Big rig semi truck transporting commercial cargo in reefer semi trailer

How to Use a Loan to Scale Your Trucking Business

10+ min read • Mar 14, 2020 • Grant Olsen

This is a big time for the trucking industry. Research from the American Trucking Association shows that about 70% of all America’s freight is hauled by trucks, accounting for $796 billion in gross freight revenues. Moving this much freight from point A to point B takes nearly 4 million Class 8 trucks traveling about 181 billion miles a year.

What type of workforce does it take to accomplish such amazing things? There are roughly 3 million drivers, 5 million support workers, and 40 million trucks in America. All told, more than 892,000 US trucking companies have registered with the Federal Motor Carrier Safety Administration. Of those companies, most are small businesses (97% operate fewer than 20 trucks, and 91% have fewer than 7).

If these small businesses wish to grow their operations, they’ll need to acquire the right loans to build the infrastructure necessary to meet the rising demand for freight. The current shortage of drivers means that when you have reliable drivers behind the wheel, you are uniquely positioned to grow.

“It is still too early to tell if we are entering a golden era for truck drivers,” says a trucking industry report from Freight Waves. “However, the heightened efforts to advance the industry in that direction currently involve a wide array of organizations—from OEMs, to system suppliers, to connected vehicle technology providers, legislators, freight brokers, and early-stage companies that deal with computing, IT, healthcare, and simulation, among others. This is all a clear indication that commercial vehicle product planning will continue to focus squarely on truck drivers for many years to come.”

Scaling Your Trucking Business Strategically

In order to scale your business, you’ll need to have a clear business plan in place. This plan will serve as your road map for expansion.

“First and foremost, your business plan should convince you that your idea makes sense—because your time, your money, and your effort are on the line,” says a business strategy report from Inc. “So a solid business plan should be a blueprint for a successful business. It should flesh out strategic plans, develop marketing and sales plans, create the foundation for smooth operations, and maybe—just maybe—convince a lender or investor to jump on board.”

If the idea of crafting a business plan seems intimidating, simply think of it as a series of answers. You ask a question about where you want your business to go or how you’ll get it there, and the resulting answers become the meat of the plan.

Questions like these can help get your plan up and running:

  • What is my main objective?
  • Where do I see my business going in the next year?
  • What strategies will I use?
  • What will be my biggest expenses?
  • How will I pay for those expenses?
  • How will I go about marketing my business?
  • How will I set myself apart from competitors?

To answer these questions, you’ll need to analyze the industry to identify challenges and opportunities, research your competitors, and look for ways to attract more clients. The common denominator for all these efforts is that they require time and effort.

“Research and analyze your product, your market, and your objective expertise,” explains a business guide from the Houston Chronicle. “Consider spending twice as much time researching, evaluating, and thinking as you spend actually writing the business plan. To write the perfect plan, you must know your company, your product, your competition, and the market intimately.”

Armed with your data-packed business plan, you’ll be able to pursue the initiatives necessary for expansion. This step will include building out the necessary infrastructure and hiring employees. Also, you’ll need to make the growth sustainable by putting marketing efforts in place to attract additional clients.

One crucial aspect that often gets overlooked in these discussions is customer service. If you want to bring in new clients and retain those you already have, you need to provide a superior experience with your business.

Create social media accounts for your business and pay attention to forums and review websites. When clients praise your business, thank them for the kind words and be sure to highlight them wherever possible. These positive highlights help to organically attract new clients, as good news spreads fast.

Inevitably, there will be times when clients have issues with your service and deliverability. Promptly respond to any complaints, as bad news typically spreads even faster than the good stuff. Ultimately, you should strive to compensate when necessary and ensure that bad customer experiences don’t have time to fester.

As you follow your business plan and tend to the various aspects of your business growth, you’ll be in a prime position for success. What will likely be needed is the key ingredient of business financing.

The Loan Options for Your Trucking Business

Due diligence is required for any entrepreneur to find an optimal business loan. There are simply too many loans with too many unique variables to just stumble into a good match.

This situation is compounded for trucking businesses because many lenders view the trucking industry as a high risk due to volatility. Also, the high costs associated with trucking make some of the most convenient forms of financing less applicable.

The good news is that financing is available to you. It just takes time to locate the ideal loan option for your needs. But once you have secured the loan, you’ll be able to fuel your business plan and scale your business in the best way possible.

“Having a good idea plays an important role in being a successful entrepreneur and small business owner, but it’s not the only requirement,” says Business.com. “Unless you have the means to self-fund, the first step is to secure a loan. But do you know how to choose the best one for your needs and objectives? […] If you don’t have any experience in the world of financing, then you probably don’t realize that there are many different types of loans. In fact, there are enough different loan types and formats to make your head spin.”

Remember, you have your road map to help you with the loan search. Your business plan should answer questions such as What will be my biggest expenses? and How will I pay for those expenses? Drawing upon your answers to those questions, you’ll be able to find loan products that align with your needs.

Here are 7 of the best loan products to consider for trucking businesses. They vary in size, term length, and interest rates, but all have unique benefits that could make them a great option.

1. SBA 7(a) loan: Small business owners love loans from the US Small Business Administration (SBA) because of their generous terms and rates. In many ways, SBA loans combine the best of traditional bank loans with the more accessible qualifications of alternate financing. Businesses that meet the agency’s size and financial requirements can access funding even if they’ve been denied repeatedly by other lenders.

With SBA loans, you don’t actually borrow money directly from the agency. Instead, they connect you with a lender and then guarantee a portion of the loan. Because the risk has been diminished, participating lenders are much more likely to be generous with borrowers.

Of all the loans the SBA offers, none is more popular than those from the 7(a) program. You can receive as much as $5,000,000, and there aren’t many limitations on how the money can be used. This flexibility means that most or all of the expenses associated with your business expansion would likely be covered.

While SBA loans may sound unbeatable, there are some downsides. Chief among them is that the approval and funding process can be long and tedious. The required paperwork is extensive and, if approved, you may not see the money for as long as 90 days.

2. SBA Express loan: Given the long timelines associated with SBA loans, this program is intended to speed things up a bit. So instead of a pile of paperwork and a 3-month wait, you get a pile of paperwork and can have cash hit your bank account in just 1 month. Yes, this wait time is still longer than most loans outside of the SBA. But if an SBA loan is your preference and time is of the essence, then an express loan could be ideal.

The nuts and bolts of express loans are similar to those from the 7(a) program, though they have smaller dollar amounts. Another difference is that there are more restrictions on how the funds can be used. Of the 3 categories of approved uses, financing equipment, increasing working capital, and debt consolidation, all could be beneficial to a trucking business focused on growth.

3. SBA 504 loan: If part of your growth strategy involves real estate, then a 504 loan could be helpful. These loans are specifically engineered for expenses related to property. Approved uses include:

  • Constructing new facilities
  • Purchasing existing buildings
  • Purchasing land
  • Making land improvements such as grading, streets, utilities, parking, or landscaping
  • Modernizing, renovating, and converting existing facilities
  • Purchasing machinery
  • Refinancing your debt to scale your business with facilities or equipment

Your business plan should include all any real estate initiatives your business needs to tackle. Assuming you have projects that fall under the umbrella of a 504 loan, you could definitely benefit from the focused nature of the financing.

4. Equipment financing: The biggest expenses in the trucking industry are tied to equipment, so this kind of financing can be an excellent option. Equipment loans provide small business owners up to $5,000,000.

Given the name, it’s easy to think of these loans relating specifically to trucks, trailers, and tools. But the definition of equipment is fairly broad. For example, you could use this type of financing to add solar panels to the roof of your office, upgrade your computers, or even purchase a new software program to help with daily tasks.

One major benefit of these loans is that the equipment you are purchasing serves as the collateral. Because the lender’s risk is lowered by a valuable and tangible asset, they’ll be more motivated to approve you and offer a generous interest rate. Of course, if you were to default, the equipment would become the property of the lender.

5. Line of credit: Meet the antithesis of equipment financing. With an equipment loan, you get up to $5,000,000, but a line of credit maxes out at $500,000. An equipment loan delivers a lump sum and you owe interest on the entire amount, while a line of credit is revolving, so you only pay interest on what you use.

The flexibility of a line of credit makes it ideal for smaller expenses related to your trucking business. Whether it’s bringing on new drivers, replacing the carpet in your office, or paying for retread, a line of credit helps you foot the bill.

6. Term loan: Here’s another option for large purchases. A term loan can connect you with up to $2,000,000 and the interest rates start at a borrower-friendly 6%. Unlike glacially slow SBA loans, the money from a term loan can reach your account in just a few days.

These loans are versatile and have few limitations on how you use the money for your business. What term loans lack in flashiness, they more than make up in utility.

7. Short term loan: If the funding for term loans is considered fast, a short term loan can only be described as blazingly fast. In some cases, the money can reach you in just 24 hours.

This expediency is highly attractive, but it comes at a premium cost. The interest rates on short term loans begin at 8% and can go much higher. The repayment terms are similarly less generous, only lasting between 1 and 3 years. And the amounts for these loans are typically much smaller than with a standard term loan.

Identifying the Best Loan Option

Multiple resources are available to help you whittle down your list of possible small business loans. First of all, you may have been a mathlete in high school, but it’s always helpful to use a free online calculator instead of just crunching the numbers in your head. Loan calculators allow you to quickly and accurately deduce what the payments would look like for any given loan.

You’ll also want to pay close attention to the specific pricing metrics of a loan. Here are 4 metrics that are used to break down loan payments into more digestible portions:

  1. Annual Percentage Rate (APR): This is one of the most commonly referenced metrics when it comes to financing. It presents a loan’s cost as a yearly rate.
  2. Average Monthly Payment: Since many budgets are based on a monthly model, this metric can help you see how a loan would impact your regular flow of money.
  3. Cents on the Dollar: Here is one of the most micro views you can take. This metric reveals the fees and interest you’ll pay for each dollar borrowed.
  4. Total Cost of Capital (TCC): On the opposite end of the spectrum, this metric essentially combines all the interest and fees to give you a comprehensive number.

Although metrics are valuable assets, you should know that there can be inconsistencies in the way some lenders list their fees. And comparisons always become difficult when ambiguity enters the picture.

You can remedy this issue by using SMART Box™. It’s a comparison tool that helps put loan options on the same playing field by highlighting common language and clear disclosure standards. When it comes to pricing metrics and calculations, it’s one of the most robust resources available to small business owners.

SHARE

Grant Olsen

Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.