How to Finance a Trucking Business

Last Updated February 28, 2024

With more and more consumers preferring to shop online, the demand for shipping services keeps rising. The trucking industry has been picking up pace in recent years, considering that trucks transport 70% of the total domestic freight tonnage.

As per recent research, 63% of online shoppers expect their package to arrive in under three days from the day of ordering. The same study found that 83% of online buyers were willing to pay extra money for quicker shipping.

This explains why many people are willing to venture into the trucking business. Unfortunately, there are many challenges a new trucking business has to face, with the main one being tight profit margins. A dollar in revenue for an average trucking company earns a mere $0.05 in profit. This means you have to expand within a short time to remain profitable.

However, don’t let the challenges hinder you from venturing into this lucrative business, as there are many ways of financing a new trucking business.

In this guide, we discuss and analyze different finance options you can consider as a new trucking business.

Keep reading to learn different ways of funding your new trucking company.

Traditional Bank Loans

Banks are probably the first avenue that comes to mind when you are looking for ways of financing your new trucking business.

However, while bank loans might be the lowest-cost form of financing option available, they can be difficult to access. To qualify for a business bank loan, you have to be in business for some time. Also, you must justify your ability to repay and have a high credit score, healthy business financial flow, collateral, and a personal guarantee to qualify for a substantial business loan.

Not to mention that it takes a serious amount of time and effort to apply for a substantial loan- the whole process can take you up to three months.

However, the good thing is that if you qualify for a traditional bank loan, you can enjoy an affordable way of funding your new trucking business.

Keep in mind that the business loan you will be given works almost like a personal loan. This means a bank will lend you money, which you will have to repay within a given time with an agreed interest on top.

Typically, you will have to make regular repayments that are deducted from your business account.

Overall, traditional bank loans are one of the best long-term financing options, thanks to their low-interest rates. Not to mention that they help you build your business credit score when you make on-time repayments.

There are generally no surprises for traditional bank loans as banks disclose all the information when you are signing up your loan agreement. However, it is wise to compare different banks as some loans may have variable interest rates, meaning that repayment amounts may change with interest rate.

Therefore, make sure to read and understand the loan terms before you sign your agreement with the bank. In most cases, banks will assign a loan officer or professional bank for assistance.

Pros of Traditional Bank Loans

• Lower interest rates as compared to many other options
• Helps build your business credit score
• Predictable monthly payments
• Access to professional financial advice from a qualified banker

Cons of Traditional Bank Loans

• Lengthy application process with plenty of paperwork
• Requires strong credit score
• Long wait time
• Usually requires one to present a specific collateral

Who’s Best Suited for Traditional Bank Loans?

Traditional bank loans suit people with good credit scores and those with collateral.

Also, if you want a substantial loan and are not in a hurry, this is a great option to explore.

If you can qualify for a traditional bank loan, go for it. It offers an affordable way to finance your new trucking business and maintain cash flow.

SBA Loans

This is another affordable option you can explore when looking to finance your new trucking business. SBA loans carry low-interest rates and have favorable repayment terms. These loans are guaranteed in part by the U.S. Small Business Administration.

Created in 1953, the SBA is a U.S. federal government agency that helps small businesses with capital, financial advice, and expertise. SBA gets its funding from taxpayers, so you should take advantage of their loans to utilize your tax dollars.

There are different types of SBA loans you can consider;

SBA 7 (a) Loans

This is the most popular type of SBA loan and is meant for different funding purposes, including new construction, equipment purchase, expansion, renovation, working capital, inventory, or starting a business, among others. You can take a maximum loan amount of $5 million, which should be repaid within a set period, majorly between 10-25 years.

SBA Express Loans

These are smaller loans not exceeding $350,000. They are quickly approved, and one can use them for similar purposes as 7 (a) loans. The repayment period may go up to 10 years, depending on the terms of the loan.

SBA 504 Loans

These are long-term loans meant to help small businesses acquire fixed assets to modernize and expand their business.

SBA Microloans

These loans may be used to buy equipment, machinery, fixtures, supplies, or for working capital. They are great for startups.

Other types of loans extended by SBA, although not suitable for new trucking business, include;

• SBA Disaster Loans
• SBA International Trade Loans
• SBA Export Working Capital Loans
• SBA Export Express Loans
• Community Advantage

Pros of SBA Loans

• Low-interest rates
• Low down payments
• Available for many purposes
• Favorable terms of repayment
• Favorable collateral requirements

Cons of SBA Loans

• Long wait periods
• You need to have good credit to qualify
• Personal guarantee needed

Who’s Best Suited for SBA Loans?

Anyone who has good credit and is starting a business of the capacity listed at SBA should apply for an SBA loan. Keep in mind that you have to demonstrate you need a loan from SBA because you can’t get credit at comparable terms elsewhere.

Equipment Financing

This is one of the unsung forms of financing for startups. With equipment financing, a trucking business can work with a lender to finance equipment or assets that the business needs.

There are several reasons equipment financing is an excellent way of funding your trucking startup: First, it will help you spread out the cost of paying for business equipment across several years; second, it will help you access capital to purchase expensive equipment you might otherwise wouldn’t afford.

The good thing with equipment loans is that you don’t need to have a perfect business financial history or good credit score to get one. This is because the lender uses the equipment as collateral for your loan.

Another benefit of equipment loans is that they will help your new trucking business maintain constant cash flow as big equipment purchases often take a significant bite out of operating capital, which can negatively affect some business processes.

Additionally, unlike traditional bank loans and SBA loans, equipment loans have little paperwork and faster processing time.

However, on the downside, the loan term lasts as long as the equipment does. This makes it a no quick-pay-off loan unless you manage to prepay your loan. In addition, it lacks flexibility as the lender won’t extend the loan term past when the equipment value falls below sensible marketing value.

Pros of Equipment Financing

• Quick approval process
• Spread the cost of purchase, and thus ease cash flow problems
• No need for another collateral
• May help increase your business revenue

Cons of equipment Financing

• Only limited to equipment acquisition
• Higher interest rates than traditional loans

Who’s Best Suited for Equipment Financing?

If you can’t afford big-ticket purchases for your trucking business, such as delivery trucks or equipment for your storehouse, then equipment financing might be the option for you.

Business Lines of Credit

A business line of credit can be a valuable financing option for a trucking business that wants to take a strategic approach to make sure resources needed for day-to-day operations are available.

In financial terms, a business line of credit (LOC) is a circling loan that allows a business to access a fixed amount of capital for meeting short-term financial needs.

This is a great financing option for meeting short-term net working capital requirements such as purchasing inventory, financing an advertisement campaign, repairing critical equipment, bridging the unexpected cash flow gap, etc.

There are two main types of business lines of credit, including secured LOC and unsecured LOC. Secured business line of credit requires a business to offer pledges of specific assets such as inventory or accounts receivables as collateral for the credit. Conversely, an unsecured business line of credit doesn’t require an asset as collateral. However, a personal guarantee and a general lien might be required.

When you open a business LOC, you get access to a set amount of funds to use when needed. You will have a monthly statement showing the credit used and interest charges. Payment terms might be either weekly or monthly.

Pros of Business Lines of Credit

• Flexible credit line
• No collateral required in many instances
• No interest charged until you use funds
• No restrictions on how to use funds
• Funds renew as you pay the debt

Cons of business line of credit

• Access and inactivity fees may apply
• Shorter repayment period as compared to other loans
• Possible minimum amounts for withdrawal

Who’s Best Suited for a Business Line of Credit?

This form of financing is suitable for trucking businesses with high short-term capital needs to manage day-to-day cash flow needs. For instance, when there are loads of packages to be delivered during peak seasons, there can be cash flow problems before delivery fees are paid. The LOC can help you keep up with shipping demands.

Business Credit Cards

You can also fund your trucking business using a credit card, especially when other funding options are unavailable.

Funding a trucking business can be a viable option, especially if you have a high credit limit and the card has a reward program for usage.

There are many business credit card offers, and thus you should take time to analyze different offers tailored for your business. You can negotiate for better terms, especially if you have good credit, and always watch for better deals.

Pros of Using Business Credit Cards

• Revolving credit
• Relatively lower interest rates as long as you make timely payments
• Great for managing cash flow
• Rewards program
• No balance transfer fees in most cases

Cons of Using Business Credit Cards

• Easy to abuse
• May only offer small amounts

Who’s Best Suited for Business Credit Cards?

A new trucking business owner might turn to this form of financing if it can pay off its balance every month. Keep it open for when you need a smaller amount of cash for running your trucking business.

Invoice Factoring

When you are starting up a trucking business, you need to have a strong cash flow. However, you can find it difficult to get finances for your startup due to lenders’ requirements, such as solid credit history, longevity in business, etc. This is why an invoice factoring service is a good financing option to explore.

Unlike traditional loans, invoice factoring allows one to sell outstanding invoices to a factoring business for instant funding. This means you will not have to wait for 30 or 90 days to receive the money owned by online stores. You get a lump sum of between 80-90% of the total invoice value in most cases.

This is a helpful option for when your new trucking business is experiencing cash flow gaps due to late invoice payments.

Pros of Invoice Factoring

• Provides quick cash for daily operating expenses such as fuel
• Saves your valuable time as you don’t have to keep track of invoices
• You can easily fund business expansion
• Helps you avoid debt since you aren’t borrowing money
• Get instant cash flow

Cons of Invoice Factoring

• You are responsible if the customer fails to pay the invoice
• Your reputation can be impacted if the invoice factoring company exercises bad collection practices

Who’s Best Suited for Invoice Factoring?

Invoice factoring is great for when your business needs immediate cash. However, you need to weigh the pros and cons before you apply for factoring. Read our guides on trucking factoring and average trucking invoice factoring rates for more information.

Conclusion

There are many ways of financing your new trucking business. The key is to explore the options, understand the terms, and make sure you borrow responsibly.