Every successful trucking company needs to use financing at some point. Growing companies have to buy equipment, pay employees, and handle multiple expenses. Eventually, the owner will run out of funds and use external financing. This article discusses how trucking company owners can finance their two most significant expenses: equipment purchases and operations. It also provides different options for trucking carriers based on their size. We cover:
- Equipment vs. operations
- Financing equipment
- Financing operations
- Small to midsized carriers
- Larger carriers
- Final suggestion
1. Equipment vs. operations
Most growing trucking carriers encounter two very different financial needs when running a trucking company. As demand for their services grows, carriers need funds to expand their fleet. However, growth also brings other financial challenges. The business owner may also need funds to pay the ongoing costs of keeping the business operational. The type of financing you get must match the challenge you are trying to solve. This strategy helps ensure that you solve the problem most effectively.
New business owners sometimes use terms such as “financing,” “loans,” and “lines of credit” interchangeably. This common misunderstanding can lead to problems. Each financing product helps solve a specific type of problem. Matching the correct financing tool with the challenge you are trying to solve is one of the keys to running a successful trucking company. We cover these options in the following sections.
2. How to finance equipment
In general, equipment is an asset you use in your company’s regular operation. For most trucking companies, equipment usually refers to trucks and trailers. There are two common ways to buy equipment. These two options apply to carriers of every size, from owner-operators to large carriers.
A loan allows you to buy the truck or trailer and covers the purchase cost. Loans are amortized over a number of years and have a fixed monthly payment. The APR is included in the monthly payment. The lender pays the dealer directly and secures their loan by filing a lien (PPSA or hypothèque, depending on your province) on the equipment. The lien is released once your company makes the final payment. At that point, you have clear ownership of the equipment.
Leases can be more complex than loans, in our opinion. Leases are structured to operate much like renting the equipment. Your company gets to use the equipment for a specified number of years for a monthly payment. At the end of most leases, the trucking company has the option to return the equipment or purchase it. In these cases, the purchase price is negotiated at the beginning of the lease and is called the “residual value.”
c) Which is better?
Financial experts have different opinions regarding which option is better. In reality, the better option depends on your individual circumstances and objectives. Our only suggestion is that you should consult a qualified accountant. They can help you examine your situation and provide the pros and cons of each alternative.
Smaller companies, especially owner-operators, may hesitate to pay an accountant for a consultation due to its cost. Remember that the cost of asking an accountant is much less than the cost of making the wrong financial decision.
Note: Commercial Capital LLC does not provide equipment financing. We specialize in financing operations only.
3. How to finance operations
Companies that need to finance operations usually need funds to pay the expenses of running the business. In most cases, their financial problems are due to the timing of revenues and expenses.
Let’s examine a company’s expenses. Trucking companies have several ongoing fixed costs that have to be paid regularly to keep the business going. Furthermore, they also must pay the costs of picking up and delivering a load before they can send an invoice to the shipper.
However, shippers don’t pay your invoice immediately. Instead, they pay on net-30-day terms (or longer). These terms give them a month or so to pay their invoices. The only exception is shippers that offer a quick pay. In these cases, the shipper pays in less than ten days but takes a discount from the invoice.
The carrier is faced with ongoing expenses but delayed revenues. They must bridge the difference by using their cash reserves until their invoices get paid. Therein lies the problem. Most carriers have small cash reserves. This situation can lead to problems if the company grows quickly or encounters an unexpected problem. Companies that face these challenges need to use financing to solve them and grow.
4. Small to midsized carriers
In general, the number of financing options available to companies increases with their size. Small and midsized carriers generally get operation financing through their bank or by working with a factoring company.
a) Bank financing
Some banks offer revolving lines of credit to small businesses. Revolving lines of credit work well in this case because they can be used as needed and then paid back. They also have the lowest costs. These benefits make lines of credit an ideal option for many companies.
However, lines of credit have some limitations. They are not easy to get since they usually have a strict underwriting process. Most of these lines are unavailable to new businesses or companies with financial issues. Lastly, lines typically have several covenants, which can place restrictions/requirements on your business.
Trucking carriers that cannot qualify for bank financing should consider freight bill factoring. This solution is a specialized form of factoring tailored to the trucking industry’s needs.
Freight bill factoring works by providing an advance against your net-30 invoices. The factoring company can advance up to 95% as an initial advance. The remaining funds, less the financing fee, are deposited into your account once your clients pay on their usual terms.
Qualifying for a factoring line is easier than getting bank financing. The most important requirements to qualify include having creditworthy shippers, having no liens against your accounts receivable, and not having significant problems. Most lines can be set up and funded in a few days. To learn more, read “What is Freight Factoring?”
5. Larger carriers
Larger carriers have more financing options simply by virtue of their size. Most larger carriers generally get conventional lender financing, asset-based financing, or factoring. The type of solution they get depends on their circumstances.
a) Lender financing
Larger carriers can usually get a line of credit from a bank or a specialized private lender. These revolving lines of credit tend to be flexible and competitively priced. However, they are also hard to obtain and usually have a number of covenants that carriers must comply with.
b) Asset-based financing
Carriers with minimum revenues of $800,000 can consider asset-based financing. While this solution allows carriers to finance most types of assets, they also have the option to finance only their accounts receivable. Usually, this option takes the form of an accounts receivable-based line of credit.
An accounts receivable-based line of credit allows carriers to borrow up to 90% of their eligible receivables. The line allows you to draw funds as required and is settled as accounts receivable are paid. One crucial advantage of asset-based loans is that they have fewer covenants than conventional lines of credit. This feature makes asset-based financing an ideal option for growing trucking carriers. To learn more, read “What is an Asset-Based Loan?”
Factoring is an option that larger carriers can use if they cannot get asset-based financing or if they need a solution with fewer restrictive covenants. For larger carriers, the rate they pay for using factoring is somewhat higher than the rate for a receivables-backed, asset-based loan. However, the flexibility may be worth it.
6. Final suggestion
We don’t think a single solution works for every challenge or situation. Instead, you must choose the correct option given your specific circumstances. If you are unsure or unfamiliar with finance, consider working with an accountant or similarly qualified professional.
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