If you've been working as a company driver for a few years, becoming an owner-operator can increase your earning potential. But, it can also lead you to financial ruin if you'e not smart about it. According to OOIDA data, the failure rate of new trucking businesses is 30-35% in the first year and 60% by year five.  

Many owner-operators earn over $100,000 per year. You have to have a business sense and know what kinds of expenses to anticipate, but it's doable.

Here are five steps for a company driver getting into the owner-operator game.

How To Become an Owner-Operator

Step 1 - Have a ton of cash

The number one reason new trucking businesses fail is due to lack of capital. You must save up a LOT of money before becoming an owner-op, and expect the unexpected. Besides the normal startup costs and your down payment for your truck, you'll want a reserve stash in case of a breakdown or a recall on your truck.

You'll also need working capital to cover routine expenses like fuel, insurance, and repairs. If you invoice the customer directly, they might take a while to pay. Most companies will negotiate net 30 terms. That is, they have up to 30 days, possibly even 60, 90 or 120 days, from the invoice date to pay.

If you're running under your own authority, you can improve cash flow through freight factoring. You send the invoice to the freight factoring company and you get a cash advance for a fee, typically between 1% and 4% for the first 30 days.

Leasing with a carrier is also a good way to improve cash flow. The carrier takes care of customer invoicing and pays you settlements weekly.

Step 2 - Buy a Truck

When deciding on a truck to buy, weigh your options carefully and understand what impact it will have on your day-to-day costs.  

Monthly Truck Payments and Interest

Most owner-operators who are just starting out will go with a used truck until they build up enough capital to invest in a new one. 

If you have the money for a down payment and good credit, you might want a new truck. You can expect higher monthly payments, but knowing you have a reliable vehicle might make it worth it. 

Fuel Economy

As a company driver, your employer may have held you to fuel economy standards. They tracked your idle time, out-of-route miles, approved fuel stops, and other metrics.

Becoming an owner-operator means you have to manage your own fuel expenses, which could be a factor in deciding whether to get a new truck or a used, late-model truck.

Commercial truck makers are constantly improving fuel economy. A newer, more fuel-efficient truck can keep your fuel costs down.

Maintenance Costs

Downtime for repairs can be costly. Buying new takes away the uncertainty of the truck's history. A used truck may have had a hard life and cause a maintenance nightmare.

If you go with a new truck, the factory warranty covers some of your repairs. But it's not uncommon to hear of recalls on brand new trucks parts which can put your truck out of service.

Other Cost Considerations

Here are a few other things to think about when deciding whether to get a new or used truck.

• Used trucks depreciate less per year than new trucks. It means you'll have better resale value with a used truck. 
• Damage insurance is based on the truck's value. That means you'll pay less to insure a used truck.
• Trucks are depreciable assets. You can write off the purchase price during the first three years to lower your taxes.

You can read more in this new vs used trucks post.

Step 3 - Choose your business model

When you change from company driver to owner-operator, you'll need to start planning ahead for your business. Where will you get loads from? How will you market and grow your business?  

A lot of owner-operators think they can make more money with their own authority. But you'll probably need help finding freight, and a lot of freight brokers keep as much as 25%. You'll need to decide whether to form a limited liability corporation (LLC) or corporation to protect you and your personal assets from any business debt or lawsuits.

You might do well to lease with a carrier, especially if you're new to owner-operating. You become an independent contractor running under the carrier's authority.  The carrier can provide you with loads and offer other discounts and support.  Fees run anywhere between 15% to 35% depending on the carrier.  

Here's a more in-depth comparison between leasing on vs getting your own authority.

Step 4 - Complete your registrations and filings

You register your base plates with your home state. You'll also need apportioned registration through the International Registration Plan (IRP). Apportioned registration means you pay a fee to all the states you operate in by a percentage of the miles you run in each state.

If you lease on with a carrier, they might help you get your plates.

You'll also need to get an Employee Identification Number (EIN) and file Heavy Vehicle Use Tax (HVUT) return, Form 2290.  

If you're running under your own authority, you'll need a need a Motor Carrier (MC) number which can take as long as 2-3 months for processing and vetting for first-time applicants. Most brokers also won't work with you unless your MC has been active for at least 90 days.

Step 5 - Get Insurance

Federal law requires you to carry at least $750,000 in liability coverage. If you haul hazmat, you'll need coverage of a least $5 million.

You'll also need bobtail insurance so that you're covered while you're not hooked up to a trailer.

Besides coverage for your truck, you need to cover the freight with cargo insurance, Federal law requires you to carry $5,000 minimum. Shippers of high-value freight might require you to carry more.

Damage Insurance covers you from expenses due to an accident, hail damage, and other mishaps. If you're making payments on your truck, the finance company will expect you to have damage insurance. 

Insurance costs $8,000 to $14,000 per year, depending on the amount of coverage. Newer authorities see costs in the higher end of that range in their first year. Leased owner-operators can usually get a discount through their motor carrier.

Tips for Making a Smooth Transition to Owner-Operator

When you transition to the owner-operator game, you become a business owner. Trucking isn't just a job anymore.

Consider hiring a certified public accountant (CPA). As a business owner, you don't get taxes taken out of your paycheck. It's up to you to pay estimated taxes each quarter. A CPA can help with your International Fuel Tax Agreement (IFTA) account as well.

Many high-paying loads land you in an area where freight is scarce or doesn't pay well. You don't get paid for deadhead miles, so always have a backhaul plan.

Work with an ASE-certified mechanic for your maintenance needs. The Automotive Service Excellence (ASE) organization rigorously tests mechanics for competence.

It's also a good idea to work with mechanics who are factory certified for the make of truck you own. Factory-certified techs know some of the repair and maintenance issues common to your make of tractor.

TrueNorth makes it easier to become an owner-operator. If you just got your own authority, sign-up to TrueNorth's platform and increase your success rate with a comprehensive suite of tools to help you find loads, manage your documents and ensure you get paid.

Owner-ops, what tips would you share with fellow drivers?