Most truckers use financing to launch their businesses. In this article, we discuss the ways you can finance new and growing trucking carriers. We discuss:
- What to do first
- How to pay for startup costs
- How to finance equipment
- Financing operations and growth
- Conclusion
1. Getting started – do this first
Many entrepreneurs jump into the trucking industry without first doing some research. They have heard that being an owner-operator is a way to make a decent living, especially since they are in high demand. So they jump into the industry and hope for the best.
Owner-operators are indeed in high demand. Some of them make a very healthy profit. However, they make a profit because they do things the right way. You could quickly end up broke if you pursue the wrong strategy. The following steps will help improve your chances of being successful.
a) Determine your industry
Before getting started, determine which industry you want to support. This step will help determine everything about your business, including your equipment, lanes, potential revenues, and expected costs. In general, the dry van market is the most competitive and pays the least. Specialized loads have less competition and usually pay more. To learn more, read “Best Niche Industry for Owner-Operators.”
b) Figure out your costs per mile
After selecting an industry, estimate your cost-per-mile. Calculating your costs is important because it helps ensure that you charge more per mile than it costs you to drive it. Estimating your costs takes quite a bit of dedication and effort. It’s an essential part of running a successful trucking company and making a good profit.
c) Decide your rate per mile
Your next step is to estimate your revenues. You can determine your expected rate-per-mile by researching the market. Start by reviewing load boards. Since load boards are competitive, they give you an idea of your bottom rates. Subtract your costs-per-mile from your rates-per mile to get an idea of your profit per mile. This calculation determines if this business model is right for you.
By the way, it’s best not to depend on load boards too much as a long-term strategy. The best way to get high-paying freight is to find trucking contracts from direct shippers. This long-term strategy is not easy at first, but it can be very rewarding financially.
d) Determine if you are comfortable with debt
There are many ways to finance a new and growing trucking company. If you use financing, you will end up with some debt. When used correctly and strategically, debt can help a business grow. However, when used incorrectly or excessively, debt can lead to serious financial problems.
Work with a CPA to determine how much debt you are comfortable with. Working with a CPA costs a few hundred dollars but may save you thousands of dollars. A good CPA will help you set up your business and its finances properly. This step improves your chances of becoming successful.
2. How to pay for startup costs
The best way to pay for many of your costs is through your savings. This effort can take a few years of planning and saving, but it is worth it.
If using your savings won’t be possible, consider an SBA Microloan. These loans offer up to $25,000 and have much simpler requirements than conventional loans. Furthermore, they often come with consulting and other services specifically designed to help small business owners.
Keep in mind that many loans file a lien on your company (and personal, at times) assets. This lien can prevent you from getting additional financing for other purposes.
Here are some initial expenses that are best paid through your savings:
- Permits
- Owner-operator insurance
- Initial fuel costs
- Initial tolls
- Emergency fund for repairs
3. How to finance your equipment
There are two ways to finance your trucking equipment. You can buy it, or you can lease it. In general, truckers are better off buying their truck and equipment. You build some equity, and the equipment is yours after the last payment.
However, buying your equipment usually requires a loan with a substantial down payment. Also, when you buy your equipment, you are responsible for all maintenance expenses.
Alternatively, you can lease the equipment. Leasing your equipment is similar to renting it. You don’t own it. However, in most cases, you are not responsible for maintenance. Many lease agreements have the option to let you buy the equipment at the end.
Each option has its advantages and disadvantages that depend on your specific situation. This is why spending some money to work with a CPA is essential. The CPA can easily run the numbers for you and help you make the right choice.
4. Financing operations and growth
Most owner-operators encounter cash flow problems at one time or another. It’s something that goes with running a business, especially one that is growing.
The most common problems come from your clients. Most shippers and brokers pay their invoices in 30 to 60 days. However, owner-operators often have immediate expenses they need to cover. These expenses include salaries, fuel, insurance, and so on.
Trucking companies that have a cash reserve can afford to wait for payment. However, companies that don’t have cash reserves can run into problems. There are three ways to handle these cash flow problems.
a) Ask for quick pays
The simplest way to accelerate your cash flow is to offer your shippers an incentive to pay you sooner. The incentive your shippers are looking for is a discount. Offering a discount for early payment is common in business and can work very well.
Larger shippers and most brokers that offer quick pays have defined discounts. For example, they will take a 2% discount and pay your invoice in 10 days or less.
Be careful of some companies that may take the quick pay discount but still pay slowly. This scenario could worsen your cash flow problems. You can spot these companies by looking at the shipper’s credit report.
But what happens if your shipper does not offer quick pays? What do you do then? This dilemma leads us to our next option.
b) Consider freight bill factoring
You can accelerate your cash flow by financing your slow-paying invoices using freight bill factoring. Factoring is simple to use and improves your cash flow.
After delivering a load, you submit the approved invoices to the factoring company. The factor processes the invoice and deposits an advance to your bank account. Once the shipper pays the invoice in full, the factor takes their fee and deposits any remaining funds to your account as a second installment.
The size of the advance varies based on the transaction structure. Some factoring companies offer single installment transactions. In these instances, the factor advances up to 98% of the invoice as an initial advance. In this case, the factor retains the remaining 2% as their fee.
Transactions can also use two installments. In that arrangement, the factoring company deposits up to 90% as a first installment. The remaining 10% is kept as a reserve. Once the shipper pays the invoice in full, the factor deposits the remaining 10% less their fee.
An important advantage of freight factoring is that this solution is easy to get. Most new carriers can easily qualify. The most important requirements to qualify are to:
- Have a fmcsa authority
- Have quality invoices that are free of liens
- Be free of major problems
The solution is very flexible. Your line can increase as your business grows. When used correctly, factoring can be a great financial tool to grow your trucking company.
c) Take advantage of fuel advances
One of the challenges you encounter when cash flow is tight is paying for fuel. This matter is serious because without fuel, you cannot work. If factoring cannot solve this problem, consider using a fuel advance.
Fuel advances are a benefit offered by some factoring companies. A fuel advance provides you with funds to pay for fuel and other expenses before delivering a load. Fuel advances can be a great resource if you are in a bind.
To get the advance, you must provide the factor with proof that the load has been booked and/or picked up. This proof varies by factor. While fuel advances have important benefits, they are also expensive. It’s best to use them strategically.
Lastly, keep in mind you have some control over fuel costs. You must understand how IFTA works in relation to diesel prices along your chosen lanes. Then plan your route and refuel accordingly. This strategy can help ensure you get the cheapest diesel price, which reduces your need for fuel advances.
5. Conclusion
Launching a new trucking carrier can be profitable if you follow the right strategy, service the right market, use financing carefully, provide a good service, and develop good shipper relationships. Lastly, work with a CPA or similar expert to help you run the numbers and ensure you have a solid business.
Get a factoring quote
We are a leading factoring company and can provide you with a competitive quote. We offer high advances and low rates. To get a quote, fill out this form or call us toll-free at (877) 300 3258.