Transitioning from being a trucker driver to becoming an owner-operator can be very rewarding. It can also be very stressful. You are faced with finding the right way to finance your new business. This task can be a challenge, especially for truck drivers who are not familiar with running a business. This article covers the most challenging financial areas for new owner-operators: financing their equipment and operations.
1) Financing your equipment
One of the biggest mistakes owner-operators make is buying their truck and trailer before developing their business strategy. In the excitement of starting their company, they get a nice-looking truck and trailer without thinking things through. This common and expensive mistake can lead to getting the wrong equipment.
A better approach is to examine the marketplace and determine which industry you want to support. Only then will you be ready to consider buying your truck and trailer.
a) What industry will you support?
Your first step should be determining the industry you want to work with and the equipment you need to pull those loads. The opportunities vary by region. Look for industries that are concentrated near your base of operations. For example, truckers in western and central Canada have the option to support oil and gas, logging, or other similar industries.
This step is essential because your industry determines your equipment. Ultimately, this step also determines your competition, your ability to find high- paying loads, and your ability to grow your trucking company. Lastly, do not buy your truck or trailer until you have determined your approximate cost per mile and rate per mile. Otherwise, you won’t know if the company will be profitable.
b) Two equipment financing options
New owner-operators have two options to handle the acquisition of their truck and trailer. They can purchase them or they can lease them. Buying a truck is straightforward. You make the initial down payment and then pay monthly until the truck is yours.
Leasing a truck can be more complex. A lease is structured almost like a rental, in which you can use the truck in exchange for a monthly payment. At the end of the lease period, you either return the truck or purchase it. The purchase price is often defined in advance and is known as the “residual value.”
Some leases are structured so that the residual value at the end of the term is a small amount – making the final purchase easy. This structure provides the option of lease-to-own.
Note that Commercial Capital LLC does not provide financing to purchase trucks.
c) Is it better to lease or buy?
There is no simple answer that fits every situation. Each alternative has advantages and disadvantages based on your individual circumstances. Generally, leases are promoted as having lower monthly payments. However, remember that every benefit comes at a cost.
The only recommendation we can offer is that you should consult an expert, such as an accountant, to help you make the correct determination. This is the most important financial decision you will make during the startup phase, and it’s essential to get it right. While using an accountant can be expensive, it will likely save you money in the long term.
2. Financing operations and growth
Once your equipment is in place, you need to focus on the expenses of running your trucking company. Trucking companies can be cash flow intensive. You need funds to cover the business’s expenses, such as rent, insurance, truck, trailer, fuel, and repairs. However, most owner-operators start their companies with a small cash reserve and quickly run into problems.
a) Net-30 payments vs. quick pays
One of the greatest financial challenges you will encounter as an owner-operator is that few shippers and brokers offer quick pays. Instead, most ask for net-30-day payment terms. These terms give your clients up to 30 days after delivery to pay your invoice.
This payment cycle has important implications for your business. Your trucking company must cover the expense of picking up and delivering the load out of its cash reserves. Then, you have to wait a month to get paid by your client. Sooner or later, you may experience cash flow issues, especially if you are growing quickly.
b) Financing operations
Dealing with net-30 payments can limit your ability to grow. You can take on only as many clients as your cash reserves allows. Otherwise, you could face serious problems that jeopardize your company. One effective way to solve this situation is to use freight factoring.
Freight bill factoring allows you to finance invoices from creditworthy shippers that pay with net-30-day terms. This solution provides you with an immediate advance of working capital that you can use to cover business expenses. One of the main advantages of freight bill factoring is that the program has flexible qualification requirements. The most important requirement to qualify is to have creditworthy shippers. Other than that, your invoices must be free of liens. To learn more, read “What is Freight Bill Factoring?”
Get more information
We provide freight bill factoring to owner-operators at competitive terms. For more information, get a factoring quote or call us toll-free at (877) 300 3258.
Note: Factoring is available only to owner-operators who operate under their own authority.
Disclaimer: This article is provided for information purposes only and is not intended as financial advice. Please consult a qualified advisor if you require financial advice.