Starting and growing a trucking company can be very profitable when done correctly. Unfortunately, many new truckers get into problems because they don’t use the right strategy to launch their business. This situation usually leads to expensive mistakes. In this article, we discuss some important points that owner-operators must consider if they want to be successful. The article covers:
- Avoid this mistake
- Select the right industry niche
- Get the right truck and trailer
- Cost per mile and rate per mile
- How to find shippers (and get loads)
- Slow payments lead to problems
- How financing helps you grow
1. Avoid this mistake
The most common mistake new owner-operators make is buying their truck and trailer before working out the details of the business. This is a problem because they end up paying for the equipment before knowing if the company will succeed. Instead, you should wait to buy or finance your equipment until after you have determined your:
- Industry niche
- Cost per mile
- Rate per mile
- Expected profitability
2. Select the right industry niche
Most new owner-operators want to haul dry van loads. These freight loads are the easiest to pull and are used by many industries. This strategy seems a safe bet and reasonable on the surface. Unfortunately, this strategy has a few drawbacks. Dry van loads are the most competitive and usually pay the lowest rates. Furthermore, large carriers and companies dominate this industry. Most new owner-operators will find it difficult to make a reasonable profit.
Rather than just choosing to pull dry van loads, you have a better chance to succeed if you select an industry niche you are familiar with. Lastly, you should also consider specialized loads since they have less competition and pay higher rates.
Some specialized types of cargo, such as refrigerated (reefer) loads, are available in all provinces. Other types of cargo may be tied to the location of your base of operations. For example, truckers located in British Columbia may want to focus on supporting the local logging industry. Carriers in Alberta may choose to support the oilfield services industry. Ultimately, you should consider an industry niche that you know well and will be profitable.
3. Get the right truck and trailer
The industry you want to support and the type of cargo you haul will determine the truck and trailer you need. There are two options to get your equipment: you can buy it, or you can lease it.
Buying your truck and trailer is the simplest option and requires qualifying for a loan. Loans have a fixed monthly payment for a number of years. The lender files a lien (or hypothèque in Quebec) on the equipment until you pay it off. The equipment is yours after you make the final payment and the lender releases the lien.
Leasing your equipment is similar to renting it. Your company gets to use the truck for a monthly payment to the leasing company. You can return or buy the equipment at the end of the lease. Most leases specify the purchase price you would have to pay if you decide to buy the equipment at the end of the lease.
c) Which option is better?
There is no easy answer to this question since the better option depends on your circumstances. Many experts say that leases are usually cheaper. However, leases also have their drawbacks. This important decision will affect your trucking company’s success.
If you are not familiar with finance, consider working with an accountant or similar professional. They will help you determine the right choice for your situation. While getting an accountant seems expensive, it is cheaper than making a mistake.
4. Cost per mile and rate per mile
The next step is determining two critical figures: your cost per mile and rate per mile. Every successful trucking company has an accurate estimate of their expected cost per mile. You need this figure to determine what rate to charge. Without it, your rate per mile could be too low and lead to a loss.
a) Cost per mile
The cost per mile is the approximate cost your company pays to haul a load for a mile. It accounts for your fixed expenses, variable expenses, and the number of miles you plan to drive during the year. Fixed expenses are costs that don’t change regardless of the miles you drive. These include rent, insurance, permits, equipment payments, etc. Variable expenses are costs that increase with the number of miles you drive. These include fuel, tires, repairs, etc.
b) Rate per mile
The rate per mile is the rate you charge shippers to haul a load. Using a load board, you can get a simple estimate of what the market pays. The load board gives you an idea of the going rates for the loads you want to haul and the lanes you wish to drive. Look at the rates in both directions of the lane, going to and returning from the destination.
Keep in mind that the rate estimate using a load board is lower than what a direct shipper would pay you if you worked with them. Load boards have a lot of competition, which affects your rates. Here is a list of load boards you can use for your research.
c) Will your company be profitable?
Use your expected cost per mile and rate per mile to determine how much profit you will make. Then ask yourself if the profit is acceptable. If your profit is too low, or you have a loss, make changes to the model until you are satisfied.
5. How to find direct shippers
Many new owner-operators believe they can run a profitable company by getting their loads solely from a load board. Unfortunately, few owner-operators succeed in following that strategy. This is because these loads are the hardest to get and usually pay the lowest rates.
The best way to get high-paying loads is to work with direct shippers. These clients value your services and pay the best rates per mile. Finding direct shippers requires a lot of work and takes time to show results. However, most successful owner-operators consider that hauling loads for direct shippers is the best strategy to grow your company.
Create a list of companies in the industry you want to work in. You can develop your list using the internet or simply join a trade association. Call each company and ask to speak to the shipping manager. During your conversation, inquire about what you need to do to get on the approved shipper’s list. Some truckers invest in a few promotional items with their contact information, such as pens and pads, and leave a few with the shipping manager. It’s a low-key way of keeping yourself in front of potential clients.
Lastly, you can use load boards to handle your excess capacity. However, your main objective should be to minimize load board use while increasing loads from direct shippers.
6. Slow payments lead to problems
A common problem for new and growing carriers is that most shippers and brokers ask for net-30-day payment terms. These terms give your clients a month (or more) to pay the invoice after delivery. Meanwhile, you must cover the expenses of picking up and delivering the load out of your cash reserves and wait a month to get paid. Few companies have the resources to offer net-30 terms and take on many new clients.
One way to improve your cash flow is to work with shippers that offer quick pays. Shippers that offer quick pays agree to pay your invoice within ten days or less in exchange for a 2% discount. Quick pays can improve your cash flow, though not every shipper offers them.
While quick pays are great, they aren’t always reliable. For many growing carriers, a better solution is to finance their freight bills with factoring.
7. Financing can help you grow
You can improve your cash flow by using freight bill factoring to finance your slow-paying invoices. Factoring provides an initial advance of up to 95% on your invoices from qualified shippers. The advance is deposited into your bank account shortly after you factor the invoice. The remaining funds, less the factor’s fee, are deposited into your bank account once your shipper pays the invoice. To learn more, read “What is Freight Bill Factoring?”
One of the advantages of factoring is that it’s easier to obtain than conventional financing. Most accounts can be set up in a few days, making factoring an ideal option for carriers that have immediate needs. The most important requirements to qualify include having good-paying shippers, invoices free of liens (or hypothèques), and being free of major problems.
Get a quote
Are you looking for a freight bill factoring quote? We are a leading factoring company and can provide you with competitive terms. For information, get an online quote or call toll-free (877) 300 3258.