The Convoy collapse was as quick as it was sudden. Convoy commanded a $3.8 billion valuation less than two years ago and employed over 1,500 workers. The online freight network promised to reduce costs and increase earnings for carriers and quickly gained market share on the back of significant financing.
The online platform received glowing reviews from key decision makers at Procter & Gamble, The Home Depot, LG Electronics, and other corporations. Convoy initially attracted many carriers who could find loads and make bids on them. The company even paid drivers quickly. Convoy QuickPay gave carriers quicker access to cash (within eight hours), and drivers could bundle their hauls to reduce empty mileage.
Despite all of the good momentum, Convoy’s business model fell apart in October 2023. The company canceled all shipments and now has an empty load board. Economic pressure, rising fuel costs, and lower demand hurt their margins and resulted in their collapse.
The company’s troubling financials make a white knight unlikely. Convoy was once a popular loading board for carriers. Now, drivers have to navigate more uncertainty that can uproot other income sources. Knowing how Convoy fell apart and staying vigilant can help carriers survive the economic downturn and emerge with more business.
Convoy Is Not an Outlier
Convoy got caught up in industry-wide issues that created risks for shippers and carriers. Convoy’s story reflects how volatile the freight industry is and how quickly fortunes can change. Although Convoy is a cautionary tale, the factors that led to the company’s downfall can affect any digital freight network or intermediary.
Many of the newer freight networks relied on leverage to rapidly gain market share, including Convoy, which raised over $1 billion. Some of these logistics companies, under the guise of tech companies, raised money from investors. Others obtained financing from alternative lenders.
The extra capital helped Convoy reach a $3.8 billion valuation at its peak. This valuation was based on gross revenue instead of net revenue. It was a major oversight among investors that eliminated acquisition as an exit plan.
A company acquiring Convoy would have to incur significant debt without sufficient net revenue to cover the debt. Convoy’s financing and net revenues make it an undesirable acquisition target from companies that would want to help. Even then, Convoy’s potential acquirers are also facing challenges in the freight brokerage industry.
Freight tech companies can reliably pay off debt when business is booming. However, declining revenue, higher interest rates, and excessive debt can make financial obligations insurmountable for newer companies.
Convoy isn’t the first freight tech company to collapse. Big brokers like Surge, Meadow Lark, and CFL have also followed suit. While Convoy was a newcomer, Meadow Lark had been in business for over 40 years before it shut down. CFL was closing in on its 100-year anniversary. Even the most established companies are facing obstacles due to volatile market conditions.
The downfall of Convoy is a high-profile event that fuels the trend. Other freight tech companies may follow suit in the coming quarters as debt becomes more challenging to manage, companies run out of capital from investors, and the freight market doesn’t recover quickly enough.
What Happens to Unpaid Earnings?
Convoy’s approaching financial insolvency can result in many drivers getting unpaid for previous deliveries. Any drivers with unpaid earnings have a high priority during bankruptcy proceedings. However, the company needs to have sufficient capital during the proceedings to distribute sufficient payments to carriers.
The type of factoring company you use also determines what happens to the money you are supposed to receive from Convoy. Most factoring companies offer resource factoring, which makes the carrier liable if the customer does not pay the invoice. Recourse factoring companies will request their payment back if they cannot collect the invoice.
Non-recourse factoring companies assume part of the risk if a broker does not pay the invoice. While non-recourse factoring companies have higher factor rates, they can give small carriers greater peace of mind as more freight tech companies go bankrupt.
Yet not all non-recourses are the same. Summar, for example, is a non-recourse factoring company with a credit guarantee, which means even more timewise and eligibility-wise coverage.
Can Small Carriers Trust Digital Platforms?
In a 2020 article, Convoy claimed its carriers average $45,000 per year after expenses. The company also claimed carriers earned $19,000 more annually with fewer hassles.
While these earnings do not reflect the company’s current business model, some carriers relied on Convoy for their income. Carriers need to replace the income they lost from Convoy. They must also replace any income lost from other freight tech companies following in Convoy’s footsteps.
While digital platforms can still connect carriers with shippers, carriers need to take a more proactive approach to their research and prospecting. Reading online reviews on a site like Trustpilot can help you gauge a freight tech company’s current outlook.
Most freight networks have a higher amount of negative reviews than positive reviews. However, the information in the reviews can shed light on the company’s financial stability. If recent reviews highlight issues with receiving payments or not having loads waiting for them, you may want to consider another freight network.
Monitoring the latest freight news can tip you off on any financial struggles these companies may endure behind the scenes. Convoy hired an investment bank to explore selling its business a few months before its collapse. These types of news items can help carriers avoid risky loading boards and focus on opportunities with more stability.
Digital freight networks only pay carriers if they stay in business. Carriers can work hard, but they have no control over whether a freight tech company stays afloat or not. Finding platforms with good reviews and working on several freight networks can reduce over-exposure to a single platform.
Networking at industry events, connecting with 3PLs, and becoming a government contractor can drum up additional business without relying on freight tech companies. Some of these sites will outlast the current economic challenges, but digital freight networks with high leverage and valuations have a greater risk of going out of business.
Navigating the Softening Freight Market
The freight industry is slowing down due to lower demand and weaker profit margins. However, this market slowdown isn’t the first. Following the playbook from similar economic downturns can leave drivers more prepared.
An economic slowdown gives the remaining small carriers an opportunity to expand their client bases. They can perform quality work and have a reliable list of prospects by the time the market recovers. Carriers who stick it out can be rewarded in the long run.
However, small carriers shouldn’t rush to fulfill every possible order. A low-single-digit profit margin is not worth the effort for most truckers. Many carriers should aim for a profit margin between 7% and 10% for each delivery, but the target depends on the carrier and their clients.
Small carriers can specialize in a certain service and become better known for that type of service. Establishing a niche makes it easier for prospects to understand how you can help them and what sets you apart. Small carriers are plentiful, and finding any way to stand out and establish your ideal clientele makes it easier to stay afloat.
Carriers can track their progress with goals on their weekly mileage. Truck drivers should strive to drive at least 2,500 miles per week and continue reaching out to prospects until they can reliably achieve that goal.
Lowering costs allow truck drivers to compensate for any slowdowns. Carriers should take a closer look at any equipment leases and other expenses as they look to improve their cash flow.
Carriers have to get defensive when necessary to preserve their bottom lines. The professionals who thrive in these scenarios don’t get too excited about good or bad market conditions and look for ways to adapt. While slowdowns are frustrating when they occur, these economic events provide enticing possibilities for the carriers who stay onboard.
Read more: How Can Truckers Survive Slow or Challenging Markets? (summar.com)
Learning from Convoy’s Collapse
Convoy’s collapse reflects what can happen to small carriers who enjoy the good times without considering future consequences. Convoy eagerly borrowed money when it was a multi-billion dollar company. The high valuation helped the freight tech company access more capital from credit lines, which contributed to initial growth.
Convoy continued to grow on the back of excess capital. Overfunding contributed to the company’s demise, and it’s a problem small carriers can also face.
During the good times, it’s easy to think that a carrier can take out more loans and invest in more trucks. Near-zero interest rates and booming demand for the industry resulted in higher profit margins and more ambitious plans. Getting too greedy and taking on too much debt can lead to hard decisions when the market slows down.
Many carriers were blindsided by the company’s decision to shut down. That means a lot of unpaid invoices and recourse factoring companies will ask drivers for their money back. Non-recourse companies with credit guarantees minimize your risk. These companies cost more, but in a volatile business, minimizing your risk can be worth the extra cost.
Summar Financial, for example, offers a unique combination of non-recourse services and a credit guarantee that effectively safeguards against the financial repercussions of broker bankruptcies. Our non-recourse factoring model ensures that carriers and truckers promptly receive payment for their services. At the same time, our comprehensive credit guarantee protects them from the financial losses they might otherwise incur due to broker insolvency.
By uniting non-recourse factoring with a credit guarantee, Summar is a trustworthy and reliable partner for carriers and truckers facing industry-wide financial instability.
Fill out this form to discover how much you can receive for your invoices. Summar also offers additional funding solutions that can assist you in staying afloat and expanding your market share.