Complete beginner’s guide to trucking finance
A trucking business, like all enterprises, runs into working capital and cash flow problems every once in a while. In a fast-moving business landscape, however, leaving these problems unaddressed could cause business failure in the near future. Fortunately, trucking loans can help keep these enterprises from folding to working capital or cash flow pressure.
There are various types of financing for trucking businesses. Below are some of the financing options available for truckers like you.
Equipment financing
Equipment financing provides cash to purchase new equipment, like trucks. There are two ways that equipment financing is extended to trucking businesses. First, the lender may request a sales invoice from the provider. Once your business receives loan approval, the lender will pay the dealer directly and leave you to take delivery of the vehicle once it is ready.
Second, the lender may forward the funds directly to you instead of acting as an intermediary. You’re in charge of looking for a good deal aside from taking delivery of your new truck.
In both cases, you’re going to need a specific amount before you apply for a loan. Like all loans, you mustn’t apply for more than what you actually need.
Freight factoring
The trucking industry rarely deals with cash payments. Instead, your business deals with terms, which compel your clients to pay you for services within a period. The standard is currently 40 days, but it can actually take up to 90 days before you’re paid by your client.
Many events can happen in 40 days or even 15 days. You may have not enough cash flow to pay your workforce, for instance. You’ll need to seek financing to rectify that deficiency. Freight factoring is useful in these cases.
Freight factoring is a form of invoice financing. Instead of waiting for the invoices to be paid, you simply forward the receivables to a factoring company. The factoring company advances a percentage of the total amount expected. You can then use the funds as you see fit – make debt repayments, pay off labor costs and settle utilities.
Revolving credit line
The revolving credit line is a great alternative to traditional term loans and bank financing. One of its advantages is its flexibility. You can borrow as much you need, and still have enough left over just in case another problem arises. Another great feature is the account replenishes itself when you’ve paid off what you borrowed.
What makes a revolving credit line vital to your working capital, however, is the fact that funds are instantly available when you need to borrow. You don’t have to repeat the cumbersome process of applying. You only need to open your account and withdraw the funds anytime you need to. There are no more approval processes once the provider has opened your credit line for you.
Short-term financing
Short-term loans are term loans that mature within a year or less. Providers generally impose less stringent approval criteria for these debts. This means that even trucking businesses with at least average credit scores can still borrow money.
Most lenders also offer flexible payment terms that fit with their clients’ needs and capabilities as much as possible. These creditors are more than willing to discuss circumstances with their clients and come up with as comfortable a repayment plan as possible.
Unlike traditional financing, short-term loans have a faster approval process. You can receive the funds in your bank account within 24 hours after notification of approval. You can then put the money for your perceived purposes, whether to fix cash flow problems or invest in long-term growth prospects.
SBA loans
SBA loans are currently the best sources of both long-term and short-term financing for trucking businesses and other industries. The Small Business Administration, a government agency, provides guarantees for these loans. Because of that guarantee, lenders can offer higher borrowing amounts while still keeping approval rates high.
SBA loans offer up to $5 million in financing, which can be repaid for up to 10 years. Average interest rates are also within 2% to 7% as well. These loans can be used for a variety of purposes – equipment financing, real estate or business acquisition, and debt repayment. The SBA also guarantees microloans that offer small businesses up to $50,000.
The qualifications for each loan guaranteed by the SBA vary. Look for accredited lenders in your area and find out how you can qualify for this form of financing.
Asset-based loans
Asset-based loans are forms of secured financing. Lenders will require you, as the borrower, to pledge an asset to guarantee your loan against. Lenders accept many types of assets, but they are particular about value. They will generally accept only assets whose value covers a huge part of your loan in case you fail to settle your obligations.
Securing your loan against an asset increases your chances of approval. However, you face the risk of losing the asset if you default. When that happens, the lender will seize the asset and auction it off to recover their costs for extending a loan to you. You should only consider these loans if you’re confident in your trucking business’ ability to earn enough revenues for repaying the loan.
Financing is part and parcel of doing business. Trucking services remained in high demand even during the pandemic. There’s unlimited income potential in this industry, but there are also risks of cash flow problems. Trucking finance can help ease some of that stress from your business by providing financial assistance to bridge gaps in cash flow.