Becoming an owner-operator can be very profitable if done correctly. It can also get you into serious financial problems if you are new to the industry and follow the wrong steps. This article was written to help aspiring truckers increase their chances of success in the industry. We cover the the following:
- The wrong way to start a trucking company
- The smart way to start a trucking company
- Mistakes to avoid
The information in this article comes from our conversations with Joel Baker. Joel was an owner-operator for over 30 years before transitioning to the insurance side of the trucking industry. He is a great resource for new truckers and runs Learn to Truck. Joel is happy to answer the questions his readers submit through his website. Keep in mind that we present this article for information purposes only. Consult an expert if you need specific advice.
The wrong way to start a trucking company
The riskiest way to start a trucking company is to go directly to trucking and launch your company right after getting your CDL. This strategy can be expensive and risky. Drivers who follow this approach usually have minimal experience and make critical mistakes. These mistakes typically “drive” them out of business in less than a year.
The first mistake they make is jumping into an industry they know little about. They buy their equipment right after meeting the minimum requirements to drive a truck and then focus on dry van loads. They worsen their situation by assuming they can get all their loads from a load board.
Truckers who rely solely on load boards compete against other truckers willing to bid less for the type of load that pays the least. They may even pull loads that pay less than the trucker’s cost per mile, resulting in a loss. Ultimately, most companies that follow this approach fail.
The smart way to launch a trucking company
There is no single right way to launch a trucking company or get into the industry. However, there is a smart approach that increases your chances of success. This approach is to take incremental steps while also avoiding large risks. This strategy allows you to build your knowledge and take the next step only when and if you are ready. As you will see, each action is deliberate and planned to help you meet your next objective.
1. Get your CDL (ideally from an established carrier)
There are two paths that a prospective trucker can follow to get their commercial driver’s license (CDL). The first path is to go to an approved school, take all the classes, and find a way to meet all the requirements for eventual qualification. We think this path is expensive and difficult.
The second approach is to work for a larger established carrier. Most major carriers, and many smaller carriers, will pay for your schooling and training. These carriers will even give you a stipend while you train. Once you complete your training, you must stay with them for some time. Using the relationship strategically and ethically can be a great opportunity.
Once you start pulling loads, get as much experience as you can. Become a model employee and learn as much as you can. Take advantage of this great opportunity. Try different lanes and types of cargo. Look at the industry in-depth and determine if it is right for you.
2. Buy your equipment
Once you have your CDL and sufficient experience with your carrier, you can go to the next step. It’s time to buy a truck and prepare to become a leased driver.
You need to buy the tractor only – and not the trailer. Remember that this truck is a business asset. Keep your costs down, and select a truck that will do the job reliably and effectively.
It’s time to get insurance as well. Your requirements as a leased driver are somewhat different from those of an owner-operator. Consult a licensed insurance agent with experience in commercial trucking.
Lastly, you will be working as an independent contractor to other carriers. It’s also a good time to speak with a CPA to understand the tax implications and determine if you need to form a company (e.g., Inc. or LLC).
3. Lease to a carrier
Leased drivers are independent business owners who own their trucks and pull loads for established carriers. Becoming a leased driver is the best way to get an idea of what it’s like to be an owner-operator without going through the initial expense.
The smart approach is to work with an existing carrier with a diverse set of customers and cargo types. Use the experience strategically and try several industries, lanes, and cargo types. Your goal is to determine which options offer the best potential for you.
This step is essential. It’s a low-risk approach to learning about the industry. Use it strategically and learn as much as you can.
4. Is all the effort really worth it?
You have put in a lot of effort to get to this step. You spent some time at a carrier getting your CDL and learning the ropes. Then you became an independent business owner as a leased driver to learn the details of the trucking industry.
At this point, you have spent a lot of time acquiring valuable and practical industry knowledge. You are in a much better position than most new owner-operators who jump into the industry with little experience.
This is the time to make a decision. Do you see enough potential to launch a business in trucking? More importantly, do you like the industry? If you are not sure, this is your time to walk away. You can cut your losses easily and pursue the next opportunity. Otherwise, it’s time to start planning your next step.
5. Start planning
Most owner-operators jump into the industry with little planning. This path is a surefire way to fail. The smart approach is to do research beforehand so that each step in your business is deliberate.
Conventional business plans can be useful. Unfortunately, most plans we have seen were badly written and held little practical value. Use whichever planning tool you prefer, but focus on the following areas. They are the key to running a successful trucking company. Don’t buy any additional equipment, and minimize other expenses until you complete this step successfully.
a) Select an industry
Your first step is to determine which industry you want to support. It’s an important step because each industry has different needs, seasonality, lanes, etc. The industry you support dictates your equipment and marketing efforts.
In general, you will do best by hauling specialized loads rather than dry vans. Specialized loads pay the highest rates and have the least competition. For example, a trucker could support a niche like the fresh produce industry. These loads are specialized and require a reefer trailer. They also provide consistent work and good pay, even during recessions. This is just one example. There are several options in the marketplace.
b) Determine cost per mile
You need to determine the cost per mile of hauling loads for the lanes you want to run. This calculation involves a lot of research. Determine your fixed expenses, variable expenses, and the miles you expect to drive. Fuel will be one of your main expenses. Consequently, you need to work out the best strategy to get the lowest diesel prices for your routes.
c) Determine rate per mile
Determining your rate per mile requires research, but it’s easier than determining the cost per mile. Get information from load boards and brokers for the routes and type of cargo you plan to pull. Remember to get pricing information for both directions – going and returning. Use this information to determine how much you can charge your shippers.
d) Evaluate if your plan works
Your last and most important step is to calculate your profit. This step should be simple since you have a good idea of your rates, costs, and number of miles. Now ask yourself, “Am I comfortable with these numbers? Do they work for me?”
If everything works out, move to the next step. Otherwise, rework your plan and expectations until you find a model that works.
5. Get your trailer
Now that you have a solid plan, it’s time to buy your trailer. The trailer needs to match the type of industry you want to support. For example, buy a reefer if you will be hauling fresh produce.
Buy a trailer that meets your needs and is reliable. Like every business purchase, your trailer must be utilitarian and cost-effective. However, always keep costs in mind.
6. Get your licenses and paperwork
This step is probably the most complex and tedious simply because of the amount of paperwork involved. However, it’s important to do each step well and in the correct order.
Here are some items you must consider. Most of these come from the FMCSA:
- Company formation (Inc., LLC, etc.)
- Accounting system
- Management software
- USDOT number
- Operating authority
- Unified carrier registration (UCR)
- Consortium and clearinghouse
- International fuel tax agreement
The list is in no specific order and is not all-inclusive. There may be other requirements based on the type of equipment, loads, and routes you use. Once this process is complete, you are officially an owner-operator. The following steps help you grow your business and avoid mistakes.
7. Your carrier may want to broker loads with you
Don’t be surprised if some of the carriers you were leased to want to send you brokered loads. Many large carriers can’t handle all the loads they get and are always looking for good, reliable owner-operators to help them. You could increase your chances of getting these loads if your work for them was professional and reliable. It is a great way to get your one-truck business started.
8. Look for direct customers and contracts
Developing these clients is the best way to generate reliable revenues and grow the business. If you have excess capacity, consider working with freight brokers. However, you should work only with well-established, reputable brokers. Make sure they have proper licensing and insurance.
As a last resort, you may consider working with load boards. Remember that these loads pay the least because of their high competition. Furthermore, they seldom lead to repeat business. Only take loads that pay more than your cost-per-mile and generate some profit. Pulling cargo at a loss is usually a bad idea and a recipe for failure.
9. Plan for success but prepare for problems
Running and growing a trucking company requires planning for success and preparing for problems. Most new owner-operators get into cash flow problems early on. These problems can lead to failure.
Cash flow problems can happen when you are growing and least expect it. You can lower your chances of having cash flow difficulties by doing a couple of things:
a) Build a cash reserve
Start building a cash reserve and emergency fund early on. This step is not difficult but requires a lot of discipline. Save some money every month and keep it in a special bank account. Keep building the reserve until you reach a level that makes you comfortable. Lastly, always replenish the reserve after you use it.
b) Freight bill factoring
Many of your customers may want to pay their invoices in 30 to 60 days. Net-30 accounts can affect your cash flow if not handled correctly. One way to improve your cash flow is to use freight bill factoring. It’s a specialized form of financing that helps owner-operators and small fleets with cash flow problems due to slow-paying invoices. Some factoring companies have great programs that offer other services, such as fuel advances. To learn more, read “What is Freight Factoring?”
Mistakes to avoid
Starting a business can be fraught with new problems. However, there are some recurring mistakes that we have seen many owner-operators make. Here are the three biggest mistakes that we see the most:
1. Buying your equipment before selecting an industry
The biggest mistake new owner-operators make is buying their equipment before selecting which industry to support. Often, they become stuck with the equipment they already purchased and can’t afford to change it. This problem is easy to prevent but hard to fix.
2. Relying on load boards (spot market)
Many new owner-operators think they can grow a successful and profitable business by relying solely on load boards (e.g., the spot market). Unfortunately, you can’t.
As mentioned before, these loads have the most competition, require the most work, and pay the least. You will always find someone willing to undercut you and will work with customers whose sole focus is price.
3. Growing too quickly
The last mistake you can make is growing too quickly. This issue may be manageable for an owner-operator. However, growth becomes much more complex once you try to grow your fleet by adding drivers and equipment. Adding drivers and equipment requires substantial planning and financial wherewithal. Don’t add new drivers quickly and without testing market conditions.