Financing Options for Trucking Companies
Whether you’re just getting started or have been in business for years, figuring out which financing options are best for your trucking company can be difficult.
To help you start your research, we’ve put together this information about multiple financing options for trucking companies. However we do recommend that you do additional research, ask questions of any potential partners and make sure you fully understand the terms, payback structure and full cost of borrowing before making any financial decision that will impact your business.
A Common Option: Loans
A very common option for any financing needs is a commercial loan. Did you know there are several different types of loans though – based on size, type of business, etc.? And not all types of loans (or lenders) are created equal.
These are specific to equipment, such as a truck. Rates and term length can and will vary based on your creditworthiness, but the equipment purchased with the loan does serve as its own collateral.
- What to look out for: Watch out for fees attached to an agreement that could add up. And be prepared to make a down payment. Even if you’re approved for 100% financing, making a down payment (if you’re able) will make repayment easier.
- How to apply: This varies. You can take an equipment loan out through a bank, a financial institution that specializes in equipment loans, or sometimes even through the manufacturer.
Small Business Association (SBA) Loans
SBA loans can sometimes be microloans in smaller amounts (e.g. $10,000) or very large loans in the millions. One advantage of an SBA loan is that the government acts as a partial guarantor. This makes it easier for banks to lend money to smaller businesses that are working on building their credit scores or don’t have an established business record yet.
- What to look out for: SBA loans tend to be fairly straightforward as far as terms, but the application process can be lengthy.
- How to apply: With an SBA loan, you’ll have to fill out paperwork with the government AND your selected lender (for instance, a bank). This can be time-consuming and may be accompanied by some back-and-forth between parties.
Short-Term Business Loans
Short-term loans are most commonly used for quick money in an emergency, and/or when other options aren’t available. They are usually expensive, so do a careful ROI analysis before taking one out. If you need money immediately to keep business moving, it may be a good option. And a shorter payback period does get the loan off your books faster.
- What to look out for: A short-term loan is often a costly option for financing, with high interest rates, fees that can add up and a required personal guarantee or lien on the equipment.
- How to apply: You’ll need to research lenders to try to get the best terms possible. Ask questions, do the math and consider all options before taking on a potentially expensive loan.
Medium-Term Business Loans
Medium-term business loans are similar to short-term loans, with a slightly longer payback period (e.g. five years as opposed to one). You get more time to pay, but that also means you’ll be paying interest over a longer period of time.
- What to look out for: A newer trucking company or one with a lower credit score will likely get hit with higher interest rates. Also, you may be asked for collateral, a personal guarantee, or to agree to a lien.
- How to apply: Banks or other financial institutions offer medium-term loans, but your eligibility may be impacted by the age and credit rating of your business. Another source you can research is an alternative lender, including newer web-based companies.
Long-Term Business Loans
Although structured similarly to short- and medium-term loans, long-term business loans are usually only a good idea for well-established and thriving companies with several years of strong results behind them. If you’re looking to grow without external investment, long-term loans can be an option for purchasing new equipment or other similar expenses. These types of loans can last for several years, and even up to a decade. Make sure that you’re comfortable with that type of repayment commitment when weighing your options.
- What to look out for: Keep an eye on terms as you normally would, and weigh the administrative ease of a single long-term loan against shorter-term options that can be just as viable, but with more flexibility year-to-year.
- How to apply: You can apply for a long-term loan through a bank, financial institution, or alternative lender. Some small business loans can serve as long-term loans.
Business Lines of Credit
A business line of credit is similar to a business credit card in that you apply and then receive an established number that you are eligible to borrow, whether from a bank or alternative lender. Each time you need money, you borrow only what you need against this total line of credit from your lender. As such, you’ll also only pay interest on the total amount borrowed. Terms vary, but generally with a business line of credit, you’ll be required to pay down your balance more quickly than with other loan options.
- What to look out for: As with a credit card, capital from a line of credit can be easy to request and quick to add up.
- How to apply: Through a bank, other financial institution, or an alternative lender
Business Credit Cards
The only real established benefit to a business credit card is its immediate availability in times of emergency. There are likely better options if you need to finance a large amount, so consider carefully before turning to this option. Cards are often a better fit for smaller and more regular purchases.
- What to look out for: Credit card interest and potential fees can add up quickly and a high credit card balance (in relation to your credit limit) has the potential to negatively impact your credit score.
- How to apply: Through an established bank or credit card company
There are also specialized types of cards to consider, such as a fuel card for fuel purchases. They may come with zero-interest credit lines that allow you to purchase fuel and repay with weekly or biweekly terms. The benefit of this type of card is that you can also get things like significant discounts on diesel fuel, rewards points from specific fuel providers, and additional discounts on maintenance and other services.
- What to look out for: Make sure the fuel card program you sign up for has a well-established network of stations along your routes. Look for fees that can add up, including transaction fees (in-network and out-of-network, monthly/annual fees, and application fees).
- How to apply: Through a fuel card program provider
Factoring is when you sell your open invoices to a factoring company instead of waiting 30 – 60 days for your customers to pay. A big plus to factoring is that it provides you with lump sum cash based on real invoices that your company has open and are due to be paid. Factoring can provide you with increased cash flow to invest in growth, perform maintenance or manage other operating expenses. Because factoring is tied directly to your actual sales, it reduces the risk to your business.
- What to look out for: When considering factoring, ask about the factoring rates, contractual obligation and any fees associated with the service.
- How to apply: Through a reputable factoring company
Merchant Cash Advances
A Merchant Cash Advance (MCA), is another way to bring in borrowed capital, but it works differently than a loan or other options and should be considered with caution. An MCA is linked to projected future sales, usually based on recurring credit and debit card transactions you’ve shared with the provider of the potential advance. Determining the payback structure and calculating the total cost of an MCA can sometimes be confusing and depends on the provider, as MCAs are not closely regulated. Additionally, an MCA only works as an option if you have a transaction history to show the lender. MCAs can be a very expensive and volatile financing option. As with other forms of financing for your trucking company, make sure you know what to watch out for – get all the facts, compare terms and estimate your payback costs.
- What to watch out for: High interest rates, outrageous fees, aggressive payback structure and loose regulations (meaning the borrower is provided with very little protection or legal recourse)
- How to apply: Through an MCA provider