Trucking Industry Hurdles

Why a Line of Credit Makes Sense for the Trucking Industry

February 6, 2023/in Industry Challenges, Trucking/by Brandon Wyson

The trucking industry is the lynchpin of the U.S. economy. Without truckers, overland eCommerce wouldn’t exist. Fleets of trucks are en transit, collecting payloads, and gassing up by the millions as you read this sentence.

Despite the massive number of truckers on the road and logistics companies mapping routes, trucking is still a low-margin business, especially for solo truckers running their own businesses. Getting caught between jobs can make it impossible to stay up-to-date on truck repayments while covering your personal expenses.

A business line of credit, then, is a uniquely valuable tool for small businesses in the trucking industry.

Key Takeaways

Continue to meet your business expenses during down periods.
Manage volatile inflation.
Prevent your cash flow from going into the red.
Invest in better technology, equipment, and vehicles.

What is a Line of Credit, and Why Does it Make Sense for the Transportation Industry?

A line of credit, or credit line, is a defined amount of money that a bank or other financial institution has agreed to lend to you which you can draw on as needed. Since cash flow is a constant challenge for the transportation industry and needing cash at short notice can strain even the most well-equipped business, a line of credit effectively gives businesses more power to cover timely expenses and cushion margins.

Trucking margins are no joke, as truckers know: Truckload carriers spent 0.18 cents per mile driven on maintenance costs alone. Specialized fleets spend an average of 18.7 cents per mile on maintenance and repair.

These figures may not sound like much, but significant repairs could quickly land your business with a five-figure repair bill. When your truck is your means of survival, it can be crushing to be hit with bills passing $10,000 just to get back on the road.

Lines of credit are designed to provide access to financing without breaking the bank. Unlike conventional business loans, you only begin making repayments when you make a draw on the money. And as a form of revolving credit, as long as the line of credit remains active, you can continually borrow as you repay. An active line of credit is a far more flexible form of financing for your trucking business enabling you to access money anytime you need it.

Trucker Loan vs. Freight Line of Credit

As a business owner, you’re likely exploring your financing options and looking into the pros and cons of both a conventional business loan and a line of credit. Every financing option has its place. At Kapitus, our intention is to match every small business with the financial products that suit them best.

To get you started un understanding the difference between the two options, here’s a quick overview of each:

Here’s a comparison of each option:

	Business Loan	Line of Credit
Loan Term	Six months to five years	Up to 12 months
Repayment	Repayments begin immediately	Repay only when you borrow
Secured/Unsecured	Both	Both
Interest Charges	Charged upon disbursement	Charged only when you borrow
Use Case	Buying a new truck	Covering sudden repair expenses

Truckers confront a range of fixed and variable expenses that can threaten their cash flow. Any time spent off the road means losing money, but with either of the above, you can continue to fulfill your business obligations – depending on your needs.

Inflation and Fuel Costs Can Make a Line of Credit the Perfect Fit

Today, the trucking industry faces unprecedented challenges. Even the leanest and most savvy trucking companies aren’t above feeling the impacts of inflation and supply chain blockages. Carriers of all sizes have been forced to innovate and pivot to continue to meet the needs of American consumers and businesses.

Taking out a secured or unsecured line of credit can be a great fit for your cash flow needs. Let’s examine why a line of credit is a valuable tool in the current trucking ecosystem.

Confronting Trucker Shortages

According to the American Trucking Association (ATA), in 2021, the trucking industry reported a shortage of 80,000 drivers. Carriers have reported a range of reasons for the shortage, including:

Retiring workers
Lifestyle clashes
Salary/Benefits

One of the most consistent pain points for American truckers is salary. The median annual salary for a commercial truck driver is just $56k. In many areas of the country, $56k is not enough to support a family or justify this challenging lifestyle.

While a line of credit is not the best option to increase salaries, it can help your cash flow remain positive, thereby helping to offset the impact that salary increases would have.

Overcoming Inflation Woes

In 2022, consumer inflation reached its highest level in 40 years. Global supply chain disruption resulting from the global COVID-19 response threw the U.S. economy into turmoil.

The Producer Price Index (PPI) for truck trailers and chassis surged throughout 2022, with February seeing a 6.3% rise, and October logging a 10.5% rise. Raw materials like aluminum and lumber spiked, meaning truckers are left paying record prices for their vehicles on top of other equipment.

Taking out a line of credit can support businesses in managing rising prices. Whether it’s helping to cover the cost of fuel or make repairs to one of your trailers to quickly get you back on the road, having a line of credit can make a big difference if those expenses come in between major deliveries. Financial gaps are inevitable in the trucking industry and lines of credit are a meaningful way to combat them.

Using a line of credit for your trucking business as a stopgap can help you cope with high price volatility caused by inflation.

Coping with High Fuel Costs

Fuel costs have been the headline headache for professional drivers worldwide. Russia’s war in Ukraine caused oil prices to spike to $123.07 per barrel in March of 2022. The impact of higher oil prices led to fuel hitting $5.00 per gallon nationwide, with some states experiencing up to $6.00 per gallon.

At the height of the fuel crisis, truckers reported spending $2,400 to fill up their tanks, which is alarming as recent rates ranged from $800 to $1,000.

While prices have come down some, gas is subject to the Feather Theory. This means gas prices have a habit of spiking quickly before slowly decreasing to previous levels.

Operating with a line of credit can provide short-term capital to cope with high fuel costs. Sudden surges can catch even the most well-prepared trucking businesses out. If you’re tied to a fixed contract, you cannot pass these costs onto your clients at short notice.

Your line of credit can stabilize your business and let you get back on the road regardless of which way fuel prices are turning.

Other Use Cases for a Trucker Line of Credit

	Use Case Example
Tied Your Trucking Company Over	If you need to wait 90-180 days for a client to pay you, a line of credit can sustain you until that invoice is paid.
Invest in Your Business	Whether upgrading your administrative software or investing in a new hydraulic lift, your line of credit can cover the cost.
Pay High-Interest Debts	Lines of credit offer lower interest rates than many other lending options. Tapping a line of credit to pay an expensive credit card bill can save your business money.
Build Your Credit	Borrowing and repaying via a line of credit enhances your trucking business’s credit score. Higher credit scores open up new doors for more extensive financing in the future, such as if you need to expand your fleet.

How Hard is it for a Trucking Company to Get a Line of Credit?

Trucking companies often struggle to secure any form of credit because of unavoidable realities of the industry. Owner-operators are especially vulnerable as most already have outstanding credit they used for their initial purchases of their vehicles and equipment.

As discussed, the trucking industry has low margins compared to other industries and stiff competition for lucrative contracts. Lenders are well aware of this which is why trucker loan applications tend to receive extra scrutiny.

This doesn’t mean, however, that trucking companies can’t get financing. Unlike other businesses, truckers frequently opt for a secured line of credit against their vehicles. As a trucker’s most valuable asset, securing a line of credit against a truck can be one of the easiest ways to get approved.

How to Apply for a Trucking Line of Credit

Applying for any kind of financing ought to come with some introspection about your business and current margins. Moreover, you’ll need to prepare documentation in advance to avoid additional delays to your application.

H3: Understand Your Business Needs

Evaluate your operation from all points of view. Focus on the root cause of any financial issues and you’ll likely see whether or not a line of credit would fit well for your business.

Ask yourself three questions:

Which expenses are causing me the biggest problems?
How much capital do I need to accomplish my business goals?
How much can I repay in a billing period?

Lines of credit ought not be used to revive an unsustainable business model. Lines of credit require prompt repayment, so any expenditure on the line must be one that you certainly can pay within the terms of your line.

Asking the above questions is an important first step that will make your conversation with lenders easier and more productive.

Prepare Your Documentation

Lenders will require you to present specific documents that paint a full picture of your trucking business. You will likely need to provide copies of bank statements, existing credit information, and in some cases a business plan. Each lender requires different documents from the businesses they partner with, so be certain to prepare these ahead of time.

Preparing this documentation in advance will enable you to speed up the application process so that you can access the capital you require as quickly as possible.

Review Your Eligibility

Trucking businesses must meet eligibility requirements set by the lender. Any reliable lender will make their minimum business requirements clear.

Applying for a line of credit through Kapitus requires you to meet minimum standards to take advantage of approvals in as little as four hours, no origination fees, and competitive rates. To apply, your trucking company must meet the following minimum requirements: :

650 credit score
2+ years in business
$180,000 average annual revenue

Lenders give requirements to paint the picture of a business who could best partner with them. While these requirements represent a baseline, they are not an upper limit.

There are several ways trucking companies could benefit from a line of credit. From emergency purchases to maintaining daily expenditures, a line of credit offers the flexibility to borrow as and when needed with no ongoing fees.

At Kapitus, our customers can apply for and get approved for a line of credit in as little as four hours. Our commercial lending specialists are ready to pair you with the financing that best fits your business.

Join the more than 50,000 businesses that have chosen Kapitus as their financing partner of choice. Connect with a Kapitus certified financing specialist to apply now for your line of credit.

Join the more than 64,000 businesses that have chosen Kapitus as their online lender of choice. Connect with a Kapitus specialist to apply now for your line of credit.

Trucking small business lending Kapitus alternative financing

Best Loan Options for the Trucking Industry

July 12, 2022/in Industry Challenges, Trucking/by Vince Calio

The COVID-19 pandemic exacerbated problems that had already existed in the commercial trucking industry for years as demand for delivered goods skyrocketed in 2020 and 2021. Those problems included issues surrounding compensation, hazard pay, COVID-19 vaccine mandates as well as a general shortage of licensed truck drivers.

While it may at first seem counterintuitive, these problems make 2022 and beyond a great time for trucking businesses to finance the expansion of their fleets and hire more drivers. Consider the fact that the demand for delivered goods, especially imported goods, will remain strong.

Also, supply chain disruptions have created an urgent need for stronger transportation systems for consumer products, and late last year, the Biden Administration announced a program aimed at increasing the number of licensed truck drivers in the country as part of the $1.2 trillion Infrastructure Investment and Jobs Act.

Kapitus trucking small business lending alternative financing

Kapitus is now offering long-duration loans specifically tailored to trucking companies.

These are, in fact, just some of the reasons Kapitus recently expanded its criteria for lending to trucking companies by offering equipment financing to purchase new or used commercial trucks via long-duration business loans with competitive pricing.

“When we get filings in, I would say that nearly 70% of the filings are trucking-related, whether it’s just box trucks for local deliveries, trailers and long-haul trucks,” said Kevin Morello, manager, asset-based finance for Kapitus. “These are comfortable deals [for lenders] to make because long-haul trucks are such strong cash-flowing assets.”

What are Your Loan Options?

There are several financing options for trucking business owners seeking to expand their fleet or buy their first truck. One of the advantages for trucking companies is that lenders generally have a positive view of commercial trucking companies – especially the big semi-trucks – because the truck itself is a cash-generating asset, and if you do take out a loan for a truck, the vehicle itself becomes the collateral. The supply chain disruptions still being felt have also made trucking services in high demand, and therefore trucks are considered “business essential.”

Like with any other lending, the type of financing you get to purchase either a used or new truck depends on your credit score and how long you’ve been in business; but there are a large number of traditional and alternative lenders.

That said, your financing options when purchasing a truck vary:

#1 Finance Directly Through a Vendor

Much like the way you would purchase a car for your personal use, you can purchase a truck through a dealer, who would then search for financing options with several different lenders for you. Traditional banks such as US Bank, Wells Fargo and Bank of America offer lending programs specifically tailored to trucking companies.

These loans typically offer low-interest rates and long durations, but don’t be surprised if you’re turned down. Traditional banks typically demand down payments which can be quite large, as an average-priced new semi-truck can cost between $100,000 and $200,000. They also have stringent requirements such as credit scores at least in the high 600s, minimum annual revenues and multiple years in business. While lenders still have an overall positive view of trucking companies, they are starting to see them as being a bit more risky in the waning days of the pandemic, as over 3,100 trucking companies went belly up at the height of COVID-19.

CDC/504 Loan

This loan is backed by the US Small Business Administration and is tailored for the purchase of fixed assets. It provides financing of up to $5 million and a term of between 10- to 20 years, and usually offers rates typically pegged to the current market rate of five- and 10-year US Treasury notes.

These loans are offered through Certified Development Companies (CDCs) and the assets must be used to promote business development within a particular area and increase employment. Like traditional banks, this type of loan carries stringent requirements such as a high credit score and multiple years in business. If you qualify , these loans can be an excellent source of financing for a new or used commercial long-haul truck.

Alternative Lending

If you’ve been turned down for a loan by a dealer or traditional bank, you’re probably going to have better luck with alternative lenders – financing companies that fall outside the traditional banking sphere. Many of these lenders operate online and offer the same range of financing options as traditional banks, often with fewer requirements but at a higher cost of capital. Alternative lenders are just as legitimate as traditional banks and typically can turn around a loan for you in less time than a traditional bank.

If you choose to go with an alternative lender, be careful, as there are many of them out there. Do your research on which ones are most popular, legitimate, and offer the most competitive rates. Some may make many appealing guarantees, but with any product or service that you purchase, it’s always best to keep that old adage in mind – if it’s too good to be true, it probably is.

Equipment Financing

Since commercial vehicles are equipment, why not investigate equipment financing? If you don’t meet the strict requirements of traditional banks, alternative lenders may require a slightly lesser credit score, usually require less paperwork, and can probably turn the loan around for you more quickly than a traditional bank.

Additionally, alternative lenders often don’t require a down payment when it comes to equipment financing. For example, according to Morello, Kapitus sees roughly half of our equipment financing customers for commercial trucks require a down payment depending on credit score and time in business.

The downside of equipment financing for commercial trucks is that alternative lenders – much like traditional banks – often require a certain amount of time in business. Put simply, it will be easier to get financing to add to your existing fleet of trucks than to obtain financing for your first truck, since lending to an established company will always be deemed less risky than lending to a first-time buyer.

“With trucking it’s challenging to finance your first truck,” said Morello. “So whenever customers come to us and it’s an owner-operator, or it’s a sole proprietor, that’s way more challenging than when you start building out your fleet. It’s also super rewarding when people come to us when they have a fleet of two or three or four, and then we can finance more than one vehicle for them.”

Business Lines of Credit

While commercial trucks typically have long shelf lives – like any piece of machinery – they need regular maintenance and repairs. This is where a business line of credit from either a traditional bank or an alternative lender will come in handy because when a truck breaks down due to wear and tear, your company will lose money fast.

A business line of credit can provide immediate cash when you need it to make emergency repairs and maintain a strong resale value for your truck. Like with any financing, it’s important to shop around to see which lenders offer the best terms and easiest access to capital.

Know Your Options

The trucking industry is in high demand right now and that probably isn’t going to change in the foreseeable future. If you’re seeking to expand your existing fleet or purchase your first truck, it’s important to closely examine your financing options and research various lenders available to you. Getting the best rates and terms on your loans may be just as important as gaining new clients.