The freight industry has seen a wave of brokerage bankruptcies in recent months, and that surge is causing significant disruptions for carriers, undermining their financial and operational stability.
Rachel Premack, editorial director at FreightWaves, and Clayton Griffin, chief strategy officer and EVP at OTR Solutions, spoke on current challenges during a fireside chat Wednesday at FreightWaves’ F3: Future of Freight Festival. Their conversation centered on obstacles faced by freight brokerages during a market downturn and the impact these failures are having on carriers, shippers and lenders.
When a brokerage goes belly-up, Griffin explained, carriers typically go unpaid and must navigate complex legal terrain to recover their payments.
“They’re certainly not getting paid in short order,” he said.
Brokers are under severe stress in the current market, Griffin said, in large part due to past investments in technology and human resources. The same aggressive expansion strategies that enabled hypergrowth stories before 2023 often now leave a brokerage deeply unprofitable with fewer avenues to raise money.
The consequence is a dangerous imbalance between cash flow and financial commitments. Freight brokers, with shrinking margins and escalating costs, are yielding to a market that has lost the fallback cushion of venture capital and equity funding.
“It’s important to understand how unique the situation is that we’re in right now,” Griffin said.
The old model and its failings
As a result, carriers are vulnerable. They not only contend with postponed or missing payments but also find themselves tangled in legal battles with murky outcomes regarding their claims in broker bankruptcies.
This gray area also affects shippers, who are caught between traditional practices of paying carriers directly and the legal formalities that may redirect those payments to bankruptcy estates.
Brokers often lean on asset-based lending (ABL) as a financial lifeline, but this dependence can become problematic when the market falters. It convolutes the compensation process for carriers.
The legalities surrounding the payment channels further compound the issue. ABL arrangements, meant as short-term solutions for brokers to manage cash flow, end up entangling funds they owe to carriers, muddying the waters of financial distribution when a broker becomes insolvent.
With no clear-cut legal framework delineating the carriers’ claims in bankruptcy cases, a vigorous debate ensues about their rightful place in the reimbursement hierarchy. Are they to be considered strategic creditors, entitled to a higher claim on assets, or partners bearing the risks alongside the brokers?
This new wave of financial distress forces a tripartite struggle as carriers, shippers and lenders grapple for payment. The established protocol, in which carriers directly approached shippers for payment following a broker’s collapse, is now being scrutinized under the harsh light of Chapter 11 proceedings.
Shippers face a dilemma: to support the broker’s restructuring process or uphold the customary practice of paying carriers directly.
The conversations taking shape around these challenges are not merely about immediate survival but also about forging strategies that will shield the industry from similar disruptions in future economic downturns. The companies that make it through this freight recession will have the kind of scar tissue that makes them better equipped down the road.
“The brokers that have made those types of decisions [like layoffs and capital expenditure reductions] will be in a much better go-forward position,” Griffin said. “You certainly have seen the number of new entrants from a brokerage perspective reduce, [but] when the market picks up I’m sure people will take advantage of the opportunity and jump into the fray.”
The overarching theme was a call for industry stakeholders to reassess relationships and strategies in the face of shifting market dynamics. As is often the case in freight and elsewhere, diversification is perhaps the best safeguard.
When markets go south, overreliance on any one company has the potential to sound the death knell for yours.