For the single-truck owner-operator, going from one truck to a second is by far one of the most difficult tasks to accomplish. To follow is salient advice lessors/lenders can provide their clients considering expansion.
By Kit West
Of the 350,000 owner-operators driving in the U.S., nearly every one of them were impacted by the COVID-19 crisis in 2020. At first, the initial fear of great change and the unknown created a hysteria of helplessness. Owner-operators that were struggling and determined that they could no longer operate as an independent, sold their trucks and either hired on as company drivers or changed careers completely. Other owner-operators saw a light and found great opportunities to grow and expand their businesses.
At this point, owner-operators in the U.S. have realized that where there is change – there is opportunity. The number of startups jumping into owning their first truck increased as well as the number of trucking companies buying their second and third truck. The government programs provided debt relief to those that needed it, and incentives to grow to those companies that could. Change is inevitable. Independent owner-operators have learned that they must either change when forced to, or they must embrace change as part of their culture and learn to roll with it.
As a lender, who are some of your most challenging clients? Startups, owner-operators or fleet owners? We have found that the single truck owner-operator growing from one truck to a second is by far the most difficult task to accomplish. The risk for default or troubled loans escalates at this point.
Your client(s) may not realize the complexity of doubling the size of their operation to two trucks. The emotional investment into the idea of being a fleet owner dominates their thoughts as they drive across the country. Even before purchasing their first truck, the idea of growing a trucking company has always been with them.
With your client being so emotionally invested into building their trucking company, they may not be able to see some of the challenges that lay before them. After a time as a profitable single-unit owner-operator, the natural next step is for the business to grow and acquire a second truck. Most owner-operator drivers have probably thought…how did all the larger, multi-unit fleet owner-operator companies get their start and grow their companies? The answer is more common than you might think…one truck at a time. Still, this path is fraught with pitfalls and each business owner must do some serious planning and thinking before doubling their fleet.
Making the jump to a two-truck operation doubles the responsibility, increases expenses, raises one’s stress and adds time commitment; everything multiplies. Purchasing a second truck and finding a reliable and trustworthy driver creates a feeling of being overwhelmed. Knowing this and going through it will require perseverance and determination. Understanding these facets beforehand and successfully surviving the two-truck transition creates momentum which, when sustained, enables more growth toward a third and fourth truck. Each successive additional truck expansion will be simpler once the second truck difficulties are conquered. The owner-operators who make the leap successfully will become even better clients and will turn to you, the lender, to help grow the company.
When working with your borrowers/lessees, here are the most common steps required – but sometimes overlooked – to make the second truck acquisition by an owner-operator a success.
- Get their own Department of Transportation (DOT) authority. Many single power unit owner-operators are leased-on and run under some other entity’s authority. Insurance and loads are handled by the leasing company, in addition to their paycheck. All that’s required is for the owner-operator to drive and maintain the truck. But having their own DOT authority provides the freedom to make additional operating decisions about their trucking company.
- Even if there is a sole owner of the business, your borrowers/lessees should create a legal business entity such as a limited liability corporation, S corporation and even a limited partnership. These entities provide more legal protection over a sole proprietorship. Is your client going to be 100 percent owner? Does your client have a partner? Is the client’s spouse involved? Owner-operators much choose partners wisely as their credit history may have a profound effect on the company’s ability to secure financing.
- Clients should check and maintain their credit score: They should strive to keep credit card debt low and meet their financial obligations – even on medical bills. And clients should run financial projections!
- Advise clients to create a Business Bank account. Their accountant or bookkeeper will be happy that the business income and expenses are separate from the personal accounts. This will also make company tax reporting and profit/loss statements more accurate and easier to produce.
- Prepare to step away from driving. For the owner of a trucking company, the best seat is often in the office. When in the office, perspectives of the business will change, which will also ensure the paperwork is in order. This will create the ability to see new business opportunities that would have never been seen while driving.
- Owner-operators should pay themselves. Clients should expect the business to make a profit. If your clients do not pay themselves, then all they have created is a new job and they are now working for a lunatic – themselves!
- Create a budget and stick to it. This will provide the insight to see all the costs, observe where the revenues are coming from and assess what the profit should be.
- Buy a profitable truck. A long nose Pete 389 Glider is a profit challenge. Yes, it has a 550 hp, DD15 engine mounted to an 18-speed transmission with dual stacks and chrome fuel tanks; those features look and sound good but don’t necessarily make a profit. A load is only worth so much a mile and there are not enough miles in the day to force a gorgeous truck with a corresponding monthly payment to cash flow and make a profit. Owner-operators should shop for the right truck; it’s out there.
- Determine beforehand how to manage and communicate with an employee driver and how the second truck will acquire its loads. Determine if the additional unit be local, regional or OTR.
10.Set aside money for worst-case scenarios. The number one reason small trucking companies fail in the U.S. is because trucks break down and there are no funds for repairs. Protective Advances are possible, but hard to get and even harder to pay off.
11.Never stop learning. Advise your clients to read, listen to podcasts and audiobooks, and keep current on trucking trends and business “Best Practices.” These activities will provide them insights to help make smart business decisions. There are numerous resources available that can help to develop the business.
12.They must stay healthy: Encourage your clients to keep in good condition both physically and mentally. Your client’s mind must be in the right place when making big decisions. Encourage them to ask for help, call a friend, partner, spouse or even you – their lender.
The 12 steps above will not guarantee a successful transition for clients from a single-unit owner-operator to a dual truck operation; however, if utilized they will help ensure most facets of doubling a company’s operations are considered. Having your clients understand what it takes to make the jump to the next level is critical for their business as well as yours in any economic environment. Disclaimer: Following these directions will provide a solid foundation for your client to build their company, but there are many additional items that can influence their success. Staying focused and determined will give them confidence to succeed in building the business. ABOUT THE AUTHOR: Kit West is Business Development Director at CH Brown Co. LLC