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 can be a challenge, especially for truck drivers that are not familiar with running a business. This article covers the financial areas that challenge new owner-operators the most: 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 will 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 determines your competition, ability to find high paying loads, and ability to grow your trucking company. Lastly, do not buy your truck or trailer until you have effectively 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 choose to 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 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 cashflow 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 biggest 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 run into cash flow issues, especially if you are growing quickly.
b) Financing operations
Dealing with net-30 payments is that they can limit your ability to grow. You will only be able to take on as many clients as your cash reserves allow. Otherwise, you could run into 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. It 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 only available to owner-operators that 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 advice.