A capital-intensive industry is one where a lot of capital is needed upfront and the return on that investment comes later. It involves the ratio of fixed expenses to variable ones. In the trucking industry, you pay for fuel, driver’s wages, insurance, etc. before your client pays you for the work you do. You need capital to pay those expenses before you can transport goods.
This leads us to the importance of credit. Trucking companies will run on credit a lot of the time. Balancing the debt your trucking company incurs until you get paid is critical to your business. If you take on too much debt, you end up in financial ruin. You need to learn how to use credit to your advantage.
Credit Helps Finance Your Company’s Growth
Growing your trucking company is a smart move. The demand for reliable transportation companies has never been more important. The American Trucking Association estimates a shortage of around 160,000 drivers in the next seven years. More trucks and drivers mean more revenues and business.
When you use credit wisely, you have the means to sustain your company’s growth. You do have to take on some debt for things like a bigger warehouse or transportation hub, new trucks, or additional staff. A loan can be a good way to fund these additions. Shop around for advantageous rates. If you learn you have bad credit, it might be better to address that first and then take out a loan.
Make sure you have the means to pay any loans you do take out. Trucking revenues fluctuate throughout the year. You might be a lot busier right as holiday shopping starts and slow down around Christmas. Take the amount you make during slow periods and make sure you can still afford the loan payment. If it will drive you further into debt, you need to look for other options.
Even if you have the option to only pay interest, you’ll never pay down the principal if you only do it that way. An adjustable-rate loan may not have you start paying down the interest for several years, but it’s best to pay down as much as you can. Ensure you have the funds to cover both interest and principal. If you can’t, you need to look at other options.
Credit Can Consolidate Debt
Here’s some food for thought. If you’re running your business by charging emergency expenses and routine bills on credit cards, can you pay everything off before interest accrues? How much are you wasting on high interest rates?
If you have been racking up debt on your business credit card, you may be dealing with average interest rates of 18% to 29%. The interest that accrues on that is absurdly high. Taking out a loan to consolidate debt is often advantageous and gives you a date when that debt is paid off for good.
With a business loan, it gets paid off over time and is gone by the end of the loan period. If you’re sticking to minimum payments on your credit card, you’re only paying interest. You’ll be paying interest forever. A loan for debt consolidation is a smart move.
The U.S. Small Business Administration offers business loans to small businesses. They’re useful in growing or starting a business. The interest rates on an adjustable-rate loan are based on the current prime rate plus 2.25% to 4.75%, depending on the size and type of loan. If the loan takes more than seven years to mature, rates are higher. A fixed-rate SBA loan ranges from prime plus 5% to 8%.
The current prime rate (as of 5/4/23) is 8.25%. That means, an adjustable SBA loan interest rate is 10.5% to 13%. A fixed-rate SBA loan is also dependent on how much you borrow. It ranges from 13.25% to 16.25%.
You’re not limited to SBA loans, however. There are business lines of credit with interest rates ranging from 8% to 60%, and term loans with rates of 6% to 45%. If you have bad credit, expect to pay 25% to 75% for a bad credit business loan. Local banks often have the most competitive banks. (Rates gathered from Bankrate on 7/20/23).
Shop around for the best rates. Even better, look for companies that specialize in the trucking industry. If you partner with a financial company or service that knows the ins and outs of trucking, it’s easier to get loan products that work for your needs. Don’t be surprised if your research brings you to alternative financing options.
Expect the Unexpected
Even the wisest business owner will run across unexpected situations from time to time. Have a plan in mind for how you’ll manage these situations. Your driver quits without notice, and an expected delivery arrives late. Your client is upset, so you lose business. If you’ve apologized profusely and the client still won’t give you another chance, there’s not much you can do.
Your driver is on the road with a new rig and the engine fails. There are no guarantees. Even a brand-new truck can run into severe mechanical issues. Warranties will cover the repairs, but there is going to be time spent without a replacement truck if you haven’t planned for events like these.
Use technology to your advantage. Load-finding apps help you fill gaps and ensure your revenue flow isn’t impacted. They’re also helpful for ensuring your trailers are full on an across-country route. A full trailer means more money in the long run. Make sure you also fill the trailer for the return back home.
Freight Factoring Arrangements Are the Wisest Way to Avoid Debt
What’s even more favorable? Freight factoring is often a better way to grow your business. Get cash right after picking up or delivering a shipment. You pay a cash advance fee to a freight factoring company and get paid the same day or within a few days. It ensures you have a steady flow of cash to keep your business running smoothly.
Look for business loans from lenders who specialize in trucking. Their expertise in trucking helps you find the right products for your needs, and that means you’ll enjoy the best possible terms.
Debt doesn’t have to be a long-term issue, which is why it’s essential to carefully plan how you use credit. If you are making more money than you have to spend, your business is going to thrive. Manage your debt by continually looking for options that bring in a steady flow of cash, shop around for advantageous loan products and interest rates, and take on more clients and work as is feasible. Don’t take on so much that you get negative feedback and reviews.
Use our tips to manage your debt in a cautious, necessary manner that doesn’t put your business at risk or cause excessive headaches when trying to get paid. A freight factoring agreement with Saint John Capital is one of the smartest ways to keep money coming in to ensure you never pay late fees or see your business credit report take a hit.
