Becoming an owner-operator seems like a choice that's full of possibilities -- and it is! You're both a trucker and a business owner. You need business smarts, and you need money. Be sure to discuss your options with a certified financial planner or a CPA before making a huge financial decision like this.
Traditional Sources of Capital
1. Personal Savings
The number one reason owner-operators fail is because of cash flow. That's why we've always encouraged drivers to save up a hefty cash reserve before starting a trucking business.
As a bare minimum, you should have a cash equivalent of two months of your expected revenue. Three months' worth or more is even better.
2. Bank or Credit Union Loan
Banks are the giants in lending. They have an established reputation and with a good credit score, you could get a low interest rate. Credit unions offer the same services as banks, but they are not-for-profit companies and usually function as a cooperative serving a specific group or community. Because they pay lower taxes and don't offer things like rewards programs, they can give better rates on loans. To find your nearest credit unions, visit CULookup.com.
Traditional loans can be hard to get though for owner-operators, especially for those with low or no credit and limited business history.
3. SBA Loans
The Small Business Administration (SBA) is a government organization that helps small businesses succeed. This includes helping people get started in a business.
The SBA itself doesn't offer loans. It does guarantee loans for small businesses from private institutions which results in lower rates for you.
- Lower rates
- Takes a long time to process -- 30-90 days
- May require having good personal and business credit scores
- May require 2-3 years in business or more
See this list of SBA lending partners: https://www.sba.gov/partners/lenders/microloan-program/list-lenders
SBA Standard 7(a) Loan and SBA 7(a) Small Loan both offer long-term loans.
- Up to $5 million for Standard 7(a); up to $350,000 for 7(a) Small Loan
- 5.5% to 8% interest rates depending on loan amount and term length
- Guarantee fees of 2%-3.75% on guaranteed amount plus ongoing fees of 0.55%
- SBA makes eligibility decisions, unless the lender is a SBA Preferred Lender
SBA Express offers Line of Credit loans and faster turnaround times
- Up to $350,000
- 7.5% to 9.5% interest rates depending on loan amount and term length
- Guarantee fees of 2%-3.75% on guaranteed amount plus ongoing fees of 0.55%
- The lender makes the eligibility decision
SBA Microloans are for loan amounts of $50,000 or less.
SBA Veterans Advantage - if you served in the US Armed Services (thank you), you may be eligible for a Standard 7(a) Loan or SBA Express and get reduced guarantee fees. The program is open to:
- Honorably discharged veterans
- Service-disabled veterans
- Active duty service member eligible for the Transition Assistance Program (TAP)
- Members of Reserves and National Guard
- Current spouse or widow of any of these
Alternative Lending Sources
When you're just starting a trucking business, it can be tough to get a business loan from traditional lenders.
- You need collateral
- You need to have been in business for 2-3 years or more
- You need a good personal and business credit rating
But here are some other ways to borrow money. Pay attention to the downsides, like high interest rates and fees, and make sure you can take on the risk.
4. Borrow Against Your 401(k)
If you have a 401(k), you have an asset to borrow against. The money comes out of your account without early withdrawal penalties. You don't need a good credit rating, you can get good rates on loans, and it takes less time than applying for a loan from a financial institution.
You can only do this with your current 401(k). If you leave your employer while having a 401(k) loan, you’'ll get slapped with early withdrawal penalties.
It's tough to start a trucking business with another job. Still, it's doable if:
- You plan to start a team operation and your partner can run solo while you pay back your 401(k).
- You hire a driver.
- You work remotely, and you have a flexible work schedule that allows you to run freight also. You should consider that you'll probably have to fund a lot of the operating expenses for the truck from your "day job." Also, if you lose your job, you'll have early withdrawal penalties.
Another option is to leave the employer and then roll over into a Solo 401(k) for self-employed persons. Then you can borrow without penalty.
Check your 401(k) documents. Not all 401(k)s have a borrowing option.
IRS regulations will let you borrow 50% of your balance or $10,000, whichever is larger. The IRS caps the borrowing amount at $50,000.
401(k) loans don't appear as debt on your credit report. If you default on the loan, it won't damage your credit score. You could use a 401(k) loan to pay down high-interest loans and free up your credit utilization, which would help your credit score and improve your eligibility for traditional loans and better rates.
5. Loans for Low Credit Scores
Online lenders, like BlueVine and OnDeck, both offer short-term business financing options even if you have low credit scores. The turnaround time is fast, as low as 24 hours. But, depending on your credit score and other factors, rates can be as expensive as 98% annual percentage rate (APR). When you apply for a loan, investors on the platform will see your request and your credit score. If they think the potential return is worth the risk, they may fund your loan.
6. Business Credit Card
If you carry a balance on credit cards, it can get expensive. Most cards have an interest rate of 24% APR or more.
Sometimes you can get an intro rate with low or zero interest. These promos usually run for the first 6 to 18 months after you sign up for the card. You might also benefit if the card offers cashback or rewards. You can't borrow as much as you can from other lending sources, but you can use the card to cover some of the smaller expenses.
Type of Loans
Business Lines of Credit
Like a credit card, a business line of credit is a revolving credit account. You pay a minimum monthly payment and borrow more when you need it. This gives you some flexibility in financing your business needs. It can get expensive. Business lines of credit often come with annual fees and draw fees.
And the interest rates are high too -- up to 25% APR with a traditional bank and as much as 99% for online lenders.
Short-Term Loans
There are a few advantages of a small business short-term loan:
- You get the money fast
- You don't need a good credit rating
- You don't need collateral
The repayment period for short-term loans is typically 18 months or less. The finance charges are higher than traditional bank loans.
Instead of interest, you're charged a factor rate. That is, you pay a fixed fee for borrowing money. Unlike loan interest, there are no savings for paying the loan off early. You pay the whole factor fee no matter when you pay it off. If you refinance with another short-term loan, you'll pay the full factor fee plus a factor fee on the new loan.
Even though you don't need collateral, you'll need to show the lender that your business has a consistent cash flow.
Invoice factoring
This is one of the most common types of financing for owner-operators. Most freight clients will negotiate payment terms of net 30 or more days. In other words, when you complete a haul and send the invoice, the client has 30 days or more to pay. This can clog up your cash flow. You can free up more cash by working with a freight factoring company. For a fee, they will pay you the invoice amount and bill the client on your behalf.
See our blog post on freight factoring to learn more.
Know Before You Borrow
Your Credit Score
The Fair Isaac Corporation created the credit score that most lenders look to approve or deny a loan. It's now known as the FICO score.
The scores range from 300 to 850. If your credit score is 650 or higher, most lenders consider you a good credit risk.
Below 620 you're considered a bad credit risk. You probably won‚'t get a loan with a decent interest rate.
3 major credit reporting companies track your FICO score.
Increase Your FICO Score
If your credit score isn't very good, you may want to work on increasing it to get better financing options. There are things you can do to bring it up.
Pay your bills on time. Lenders see past behavior as an indicator of future actions. Establish a track record of paying on time. Set up automatic payments for everything you can.
Keep your credit card balances low. Your credit utilization ratio plays a big part in your credit score. It's the total of all your credit card balances divided by your total credit limit. For example, if your credit limit is $10,000 and your credit card balance is $5,000, your credit utilization ratio is 50%. Your credit utilization ratio is based on the average balance of the last 12 credit card statements. If you can keep it below 30%, it will help your FICO score.
Keep credit card accounts you’re not using open (unless there's an annual fee). Your credit utilization ratio is your average card balance divided by your total credit limit. Closing accounts increase your ratio.
Don't apply for new credit too often. Each application opens a hard credit inquiry. Hard inquiries can lower your score, and it stays on your report for 2 years.
Dispute wrong credit info. It's possible for credit events that don't belong to you to show up on your FICO score. Credit events from someone with the same name or who previously lived at your address, for example. If you find these, visit the company's dispute center.
Final Thoughts
It’s not easy to start and finance a trucking business. That's why we encourage drivers to save as much money as they can before becoming owner-ops.
Learn more about starting a trucking business in the blog post, How To Become an Owner-Operator Without Going Broke.