Trucking and Transportation Financing in America
Even though the Covid-19 pandemic, trucking has remained a viable business. Trucking is necessary to the lives and well-being of consumers, and the trucking industry is expected to see continual growth in the $700 billion trucking industry for many years. The American Trucking Association estimates that U.S. freight volumes will increase by almost 30% over the next decade, and the industry is expected to grow so much that billions of dollars will be invested in trucks and equipment.
The trucking industry employs millions of people around the country, from warehouse workers to delivery truck drivers, and generates hundreds of billions of dollars annually. Trucks in all forms are the lifeline between producers and consumers; basically, there is no supply chain without the trucking industry. Transportation may come in many forms, but ultimately the end-point in the supply chain is the delivery truck. Delivering goods remains dynamic, and what remains constant is the ever-increasing demand from consumers keeps trucking a vital industry.
Trucks do not last forever! Industry and regulations allow the engine renovation to flourish, forcing new technology to make the trucking industry not just mile efficient but also environmentally friendly. Typical diesel trucks emit carbon compared to hydrogen or electric semi-trucks. These types of trucks are what the industry disruptors are focusing on when building the next fleet of semi-trucks. Electric semi-trucks or hydrogen-powered semis give trucks more than the typical current mileage semi-trucks can operate without becoming a burden to operate—basically, 500,000 miles of life.
Lenders see semi-trucks over 500k in mileage to be worth less than those trucks that have less mileage. The average miles each truck travels per year are over 45,000 miles, and the average lifetime of a long-haul truck is 15-16 years. Cost-prohibitive repair costs will make it easier to finance new trucks than giving loans to pay for repairs of soon-to-be-obsolete trucks with devalued asset value.
With regular maintenance and upkeep, most commercial, small box trucks, and business short-haul trucks today can last for more than 100,000 miles. Their costs vary from $30,000 to $61,000 depending on if you need a refrigerator truck (cold) or just a delivery truck. Semi-trucks can vary from $80,000 to $150,000 or more. Trucks are a good portion of a business’s expenses and can use up cash-on-hand quickly.
Small Business Types of Financing
To maintain cash flow, take advantage of write-offs and depreciation; most long and short-haul trucking companies either lease or finance their trucks. There are many different financing options for trucking companies, and a few of these options include:
Bank Trucking Loans
Banks offer competitive rates and terms on all commercial truck financing; however, trucking is the most restricted industry for any typical bank. Most financing that occurs in the trucking industry comes from alternative equipment finance lenders or private lending or private small business lenders. Most funding occurs through captive finance or the manufacturers’ financing arms. Their financing packages include equipment financing and as well as leasing for new purchases and also for used trucks.
Truck financing also occurs through alternative equipment finance. Most traditional big corporations typically have term loans, lines of credit, and asset-based lending through their local bank so they can pay cash to the dealer. However, traditional banks have higher lending requirements than other types of alternative lenders, and they do require business owners to have acceptable credit, established cash flow, personal collateral, and financial documentation.
Terms are generally from 1-7 years, require collateral, and interest rates are 5-15%. Funding amounts can range up to $5,000,000, but to qualify for such a program from your local or national bank, you must have not just a fleet of three trucks but also a history of business, contracts, and good personal and business credit. In most of your transactions, regardless of the size, banks will require a full financial package. Our alternative equipment loan requires only application up to $250,000 depending on the time in business, credit, equipment, and industry.
SBA Trucking Loans
If you are unable to obtain a traditional loan, you can secure financing through the use of the U.S. Small Business Administration’s loan guarantee program. The SBA encourages lending from the community and small banks, but shoulders the majority of the lenders’ losses should the truck owner default on the loan. To guarantee the loan, the SBA requires documentation from the company owner.
SBA loans have a 5-8% rate, last up to 25 years, and funding amounts can be up to $5,000,000. You do need to have collateral to obtain an SBA truck loan.
When most businesses have accepted the SBA PPP program, what happens to the future of other SBA transactions? No one has talked about what other SBA options small businesses will have post-COVID19, post-PPP. Will you borrow at a higher rate to pay off a lower rate to access more capital? SBA and the PPP, EIDL, have many more questions. The answers will only come in times when businesses encounter anticipated issues on how liabilities are allotted when small businesses grow or default.
Asset-Based Trucking Loans
Asset-based financing uses business or personal assets as collateral for the business line of credit or loan. Monetizing, the trucking company’s balance sheet provides lending to the trucking company if they cannot find financing through conventional lenders. Common assets used for commercial truck financing include accounts receivables, invoices, real estate, or trucking equipment.
Interest terms are 10-25%; you need to pay back the loan in 1-3 years, and funding amounts can be up to $5,000,000.
Alternative Financing for Trucking Companies
If a trucking company cannot meet traditional or SBA financing guidelines, to cover operating capital, there are alternative business financing options. These options include mid-prime alternative loans. The rates are higher than a bank loan, but terms are usually longer than primary lenders. The advantages of alternative loans include quick funding for delivery trucks and capital for operating expenses. Approval generally only takes minutes.
Terms on alternative financing will be only 12 months to 24 months. Funding amounts can be as high as $5,000,000, and collateral is not always required for a traditional working capital loan, line of credit, or term loan. If you go with a traditional bank, you will likely be required to put up additional collateral with a bigger down payment than typical alternative lenders.
What’s better than a bank loan? An alternative loan is less conforming and faster than a typical bank loan.
Invoice financing or discounted financing includes selling the trucking company’s unpaid invoices to a factoring company at a discount. Commercial truck financing, in this case, is not taking out a loan and making payments, trucking companies sell their unpaid invoices. The factoring company lends the trucking company between 70-92% of the invoice’s value as long as the invoices are not over 60 days past due.
Each week the invoice goes unpaid, the factoring company will charge the trucking company a fee for having the capital upfront rather than waiting for the trucking company to get paid. Big companies offer net term discounts typically costing the factoring fee, which could be net/10 term @ 3% discounts to cover the factoring fee. If payment is received within ten days from the invoice date, the customer receives the discount, and the company no longer has to pay the factor. Upon payment of the invoice, the factoring company forwards the trucking company the remainder of the balance. Trucking companies can use these funds to purchase trucks and equipment and free up their cash flow.
Interest rates are from 1-3% months, the payback terms are 1-2 years, and you can finance up to $5,000,000. Collateral is required.
Equipment Loan or Leasing
Equipment loan allows trucking companies to purchase new or used trucks and equipment without having to pay the full price of the equipment up front. Equipment leasing companies purchase the equipment or truck and lease the equipment back to the trucking company for years. After the agreed-upon terms, the leasing company offers the trucking company the ability to buy the equipment or extend the lease for a longer period.
When a utility truck or semi-truck costs upward of $100,000, leasing can be a very viable way to gain new equipment.
Trucking Cash Advances
If a trucking company needs immediate business financing, lacks documentation, or is a startup, an easy form of financing is a merchandise cash advance. This isn’t a loan but involves the B2B sales of the trucking company’s future revenues. The trucking company sells future receivables, which gives them access to capital quickly.
Factoring rates are from 1.10 – 1.50 and last for up to 24 months. You can fund up to $2,000,000, and you do not need collateral.
Whatever type of commercial truck financing or utility truck financing you need, there are many options. Sit down with your accountant and determine if buying outright and tying up your cash flow is more cost-effective than financing.