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Trucking Company Loans

William Anderson

With an improving economy comes improved business and trade. This is true for many parts of the world today. As the economy improves, many industries have been experiencing a surge in business and foreign trade. Tax cuts help too!

Because of this, the $700 billion trucking industry in the US has witnessed massive growth in the last decade, and the same is expected in the next decade and years to come.

According to a report by the American Trucking Association, US freight volumes are expected to rise by nearly 30 percent over the next ten years. This has led investors to pour millions of dollars into trucking, hoping to revive the trucking and transportation industry.

The freight and trucking business has also been a big source of revenue in the country. According to ATA, Trucking, in the year 2009, there were about 27 million commercial trucks registered and used for business purposes. Commercial trucks accounted for more than 25 percent of all trucks on US roads.

These trucks log nearly 398 billion miles for business annually, which accounts for around 14 percent of combined miles logged by all vehicles.

As of 2015, there were more than 33,000 trailers in the US and over 47,000 class 5 – 8 vehicles. The common assumption is that most trucking companies are large. But actually, almost all trucking companies are small, operating fewer than six trucks, and while the bigger ones have less than 20 vehicles. It is these small companies that lead the trucking industry, creating about 7 million jobs.

Given the important place that the freight and trucking industry occupies in the US, there are different privileges for those who want to start or grow their trucking business. One of them is trucking loans, issued for the purpose of helping start or grow a trucking and transportation business.

The requirement for financing is understandable since heavy vehicles like trucks and trailers are expensive. In order to start a transportation business, a number of vehicles are required including trucks, semi-trucks, trailers, real estate, truck storage, dump trucks, and tow trucks. Some of the other expenses include repair and upgrades, taxes and invoices.

Starting any business is a matter of money, and until you are making any real revenue from the business, it is hard to foot the expenses out of your own pocket.

For starting a business, loans are as common as home loans and student loans. Depending on the type of trucking business you plan to start and the kind of vehicles you want to buy – there are a number of different loans available.

Trucking Loan

Types of trucking loans

There are a number of financing options available for a trucking business. Some of the most popular trucking loans are:

Bank trucking loans

Traditional bank loans still remain the most preferred option despite the availability of other financing options. Bank loans are the oldest and widely known forms of lending and occupy a place of trust in the minds of individuals and business owners.

When it comes to trucking financing, bank loans are easily the most widely chosen option because banks are considered more trustworthy than other lenders.

Banks offer the most competitive rates when compared to all other types of lenders. Banks offer financing facilities such as term loans, lines-of-credit, equipment financing, asset-based lending, and working capital solutions, among others.

On the downside, because banks are so popular and trustworthy, they also require the borrower to be trustworthy. That is why the lending requirements of traditional banks are much higher than other lenders.

You must have a solid credit score (preferably above 600), established income and profitability, and a concrete business plan. Even if your score is lower there are small business startup loans bad credit options available. Banks loans also require collateral, which may be an existing asset like stocks, bonds, or property, or the vehicles or equipment you plan to buy with the loan amount.

Bank line of credit

Another popular loan type that is considered easier to access than traditional bank loans is a bank line of credit. Both secured and unsecured lines of credit can be used by trucking companies to cover business expenses.

A line of credit is a preapproved loan that allows the borrower to access funds whenever they need without seeking the approval of a lender. A secured line of credit often needs the  trucking company accounts receivable to be kept as collateral, but businesses may also use machinery, equipment, machinery, or commercial properties. We reviewed the best business line of credit in another article.

On the other hand, an unsecured line of credit usually issued in the form of small business credit cards requires a pristine personal and business credit score. A line of credit has interest rates between 5 and 15 percent, for one to three years, funding between $50,000 and $5,000,000.

SBA trucking loans

If you want financing for a trucking business but couldn't secure a traditional loan, there are other options, such as SBA trucking loan. With the US Small Business Administration’s loan guarantee program, you can secure financing for trucking business at the same rates as traditional banks.

The SBA encourages lending from traditional banks, community banks, and small lenders by promising to bear most of the lenders’ losses if the borrower defaults on the loan. If you choose to opt for an SBA trucking loan, you must provide certain documents to help make sure that you are able to pay off the loan.

There are three different types of SBA loans:

  1. SBA 7(a) loan, which offers up to $5.5 million in cash up to seven year terms. This is the most commonly used SBA loan
  2. CDC/504 loans, which are usually meant for purchasing commercial real estate and machinery, and has up to 25 year terms
  3. SBA microloans offer a maximum of $50,000, which can be repaid by six years

SBA loans are preferred because of their low interest rates and easy repayment terms.

Asset-based loans

Asset based loans requires either business or personal assets to be used as collateral. Asset based loans can be in the form of a business loan or a line of credit. By using the company’s balance sheet the trucking firm accesses financing that wouldn’t normally be possible from a bank or other traditional lender.

Assets usually used for these loans are invoices, accounts receivables, commercial real estate, personal real estate, or vehicles, machinery or other equipment.

There is a number of benefits of asset based loans. The biggest of them is the low rate of interest, compared to unsecured loans. Even though you have to pledge collateral, it is easier to access asset based financing at a lower interest rate because the lender's money is safe.

Another benefit is the greater liquidity of the assets for cash. As the business grows, assets also grow and are easily available when there is need for a loan.

The value of the assets is only what is important to the lender, and not your credit history or cash flow. It is also easier to access asset based loans with minimum hassle because there is collateral involved. When you have assets to pledge, asset based loans are the best way to get financing quickly.

Trucking Loan

Alternative financing options

The above options are considered traditional loans because they require collateral and a good credit history. There are instances when the trucking company may be unable to secure a loan in any of the above means. In such cases, there are alternate means of financing available to them.

Alternative financing rates are much lower than traditional lenders and merchant cash advance lenders. Their loan terms are also much longer than other lenders, allowing you easier debt coverage. The biggest benefit of alternative loans is the fast processing time.

The pre-approval process often takes minutes, and the entire funding process is completed within a week. Some of the alternative financing options are:

Invoice financing

Invoice financing is also called invoice factoring or invoice discounting and involves selling the trucking company's unpaid invoices to a factoring company at a discount. This is simply another form of asset based loan, where businesses borrow money against the amount due from customers.

The company sells their unpaid invoices to the factoring company, and when the dues are paid by the customers, the factoring company gives the trucking company about 80 to 90 percent of the money, keeping the rest as fees. The more delayed the invoice payment is, the factoring company charges a fee to the borrower.

Trucking cash advance

There are times when the trucking company may need immediate cash, but not have the require credit score or documents to avail of a traditional loan.

In such cases, the easiest form of funding is a merchant cash advance. This isn't actually a loan, but involves selling future receivables of the trucking company. By pledging the future revenue to the lender, company is able to get funding that would have otherwise required a year or more.

Equipment leasing

This type of financing enables trucking companies to purchase new or used vehicles or machinery without having to pay the full price upfront. The equipment leasing company will buy the vehicle or equipment, and then lease it to the trucking company for a certain term. At the end of the term, the company can either buy the vehicle or equipment from the leasing company or extend the lease for another few years.

How to Qualify for Trucking Loan

The most preferred way to access funding is a traditional loan. But there are a few requirements that you must fulfill to be able to qualify. The steps to follow before applying for the trucking loan are:

  1. Find Out Your Eligibility

A lot of factors go into determining your eligibility for the trucking loan. They are:

Your credit score: This is one of the most important factors that can make or break your chances of approval. A score of 600 is absolutely necessary, although some places require higher than 660. Your credit history, accounts, and credit risk are all considered by the lender when issuing a trucking loan.

Down payment: If you’re an existing owner-operator starting another trucking or transportation business, you will need to pay over 5 percent of the loan amount. But if you’re a new owner-operator, you will have to pay 10 to 20 percent of the loan amount as down payment.

Duration of CDL: In almost all cases, your commercial driver’s license should be more than five years old

Although these requirements vary from one lender to another, if you meet all of them, you have a good chance at being financed. Aside from your credit score, the time you’ve had your driver’s license is also important, because it convinces the lender that the business is going to be run by an experienced driver.

  1. Gather information

Once you find out if you’re eligible, you must gather all the information you need to submit to the lender. Arranging the documents ahead of time will speed up the process, and it also tells the lender that you’re prepared for the loan. Tax returns, bank statements, and licenses and certifications are some of the documents needed when applying for a trucking loan.

  1. Get insurance

If you’re getting a secured loan, then the machinery, equipment, or vehicle you will be purchasing (or already own) require to be kept as collateral. That is why, when applying for the loan, you must be able to show proof to the lender that the collateral is insured.

The collateral could be worth thousands of dollars, and any damage to it will not only be expensive but also hurt the loan’s collateral. Most lenders will seek proof of insurance if you’re keeping vehicles, equipment, or machinery as collateral.

Trucking is a profitable business that has scope for huge turnovers. The vehicles are the heart and soul of the trucking business, but they don’t come cheap.

With trucking loans, both new and established companies can easily access the funds they need for purchasing vehicles or other equipment for the business. Given the different types of trucking loans, there’s always an option for all kinds of trucking companies.