Thousands of businesses start every year in the U.S., and while they might vary significantly, they all share one common thing; they needed to raise money to fund the birth of the company.
Financing is one of the crucial elements every trucking business needs to succeed. As per a research study done by the U.S. Bank, cash flow crunches is the reason why 82% of America’s SMBs (small and medium-sized business) fail.
It’s no surprise for clients in the trucking industry to take 90 days to pay their freight bills. This leaves truckers in a disadvantaged position since they find it difficult to pay for business operational costs such as servicing your fleet and making payroll.
If left unpaid for a significant period, such expenses can affect the business negatively. But with the proper planning, funding, and better understanding of cash flow management, trucking business owners have a better chance of success.
However, acquiring financing is no easy walk in the park. It can be a challenging, drawn-out process, especially for trucking businesses in the startup phase or those that have poor credit. Even large trucking corporations often look for capital infusions to fund short-term obligations.
This article serves as a comprehensive guide meant to help business owners understand better the basics of business financing. It also includes a list of highly common business financing options any trucking business owner should consider.
Understanding the Basics
The first thing you should know about business financing is that there are two broad and rather distinct categories of financing; debt and equity.
Figuring out which of the two is ideal for your business can be confusing since each option has its advantages and disadvantages. Here’s a brief explanation of what they involve and a few facts that can guide you to make a well-informed decision.
What Is Debt Financing
If you’re involved in business, you must be well familiar with the debt concept. At some point in your life, you’ve probably had a student loan, used your credit card, or signed up for a car loan or mortgage. All these activities involved using borrowed money, and that’s what debt is.
Debt financing means you’ve borrowed money from a lender with the promise of paying it back within an agreed to amount of time and with interest. Some lenders ask for collateral such as property and accounts receivable as a form of reassurance.
There are several upsides to debt financing, the first of which being the lender has no control over how you run your business since they don’t claim ownership. Secondly, the interest paid to the lender is classified as a business cost and is tax-deductible. Also, paying your debts in full on time will help build your credit.
However, for you to qualify for debt financing, you have to be overwhelmingly qualified for the loan. This would mean having a long business relationship with the lender and a highly desirable credit rating.
You also have to consider how hefty a debt payment can be to your monthly expenses, especially if they’re already strained. Debt financing requires payment, regardless of if your business is doing well or not.
Examples of debt financing include bank loans, business credit cards, SBA loans, and business lines of credit.
What Is Equity Financing
Equity financing involves selling ownership rights in your business to investors. It is well suited for small businesses in fast-developing industries.
Unlike debt financing where you have to pay back the money no matter your business’s financial situation, using equity financing means you don’t have to repay the money until the business starts to make a profit.
However, this doesn’t mean there aren’t any strings attached. As partial owners of your business, the investors will be entitled to a portion of company profit through dividends. Equity financing also poses a greater risk to investors. For this reason, the cost of equity is usually higher than the cost of debt financing.
The common types of equity financing include angel investors, equity crowdfunding, and venture capitalists.
Potential Business Financing Options For Your Trucking Company
There are many types of financing available with different stipulations and turnaround times. It’s vital that you consider the needs of your business before going with a particular financing option.
Here’s a list of the most common business funding options for you to consider:
1. Accounts Receivable Factoring
Accounts receivable factoring is one of the most convenient methods of financing for trucking business owners. It involves a company selling its accounts receivable to a factoring company at a discount. The factoring company then proceeds to collect payment on the receivables from the customers of the business.
Pros and Cons of Truck Factoring
Truck factoring provides a host of benefits to trucking businesses. For starters, cash advances provided by factoring are not classified as a loan. The business does not pay back the advance to the factor, and there are no interest rates involved. The business also doesn’t have to file tons of paperwork to qualify.
Another very attractive incentive is that the advance is processed within 1-3 business days upon application. This is almost no time when you consider how long other alternative financing options take to process the funding.
The key challenge to factoring involves the fine print. Some factors charge high rates, penalties, as well as minimum stipulations where a company is compelled to factor a certain number of invoices. Some factors also include hidden charges that can transform what was initially a simple financial transaction, into a very costly one.
But not all factoring companies work like that. Make sure you conduct diligent research into the factoring companies you can work with and confirm that they have considerable experience in the trucking industry.
2. Traditional Bank Loan
It’s not surprising for you to first consider a traditional bank loan if you need working capital urgently. A bank loan is the oldest form of financing for small businesses where the bank provides a particular amount of money the business should repay within a set time.
Getting a business loan can, however, be difficult. The bank’s chief interest is getting paid back. As such, they only choose to work with businesses with substantial assets and a proven track record of generating cash.
Banks that provide business loans have different payment terms depending on the bank, the borrower’s financial standing, and the time the loan is due. The loans could either be short- or long-term.
If you have an existing checking or savings account, your bank should be able to provide you with reduced interest rates. Depending on how much you intend to receive in loans and the monthly payments, your bank should provide you with a loan that’s right for your business.
3. Self-Funding Your Business
Self-funding is perhaps the easiest way of financing a business. Also referred to as bootstrapping, self-funding involves you using your own financial resources to support your business.
Self-funding sources include your savings account, your 401k, or even turning to your friends and family for capital.
As much as it allows you to keep complete control over your business, self-funding restricts you to the money available at your disposal. It also means you will have to take on all the risks of the business. As such, you need to be very careful about your spending. Try not to use more money than you can afford.
4. Venture Capital Funding
The venture capital industry is largely misunderstood. Many startups complain about venture capitalists behaving like sharks because of their predatory business approach. However, this is not the case.
Venture capitalists are business people entrusted with the professional responsibility of investing other people’s money. To do so successfully, they have to avoid risks as much as they can while making profits from their sources of capital.
Venture capital works when a business owner trades company ownership share and an active business role for a cash injection.
To get venture capital funding, you first need to look for a reputable and experienced investor. Once you share your business proposal, the investor will review it to assess if it is of interest to them. If they decide to invest, both parties will agree on the terms and conditions before the investment is disbursed to the business.
Running a Business Requires Money
Starting a company can be an overwhelming but gratifying process. Every business has different needs depending on the size and industry of operation. The financial situation of your company and your ambitions will determine the fiscal future of your enterprise.
There is no one size fits all financial solution to funding a trucking business. A good business strategy is to avoid putting all your eggs in a single basket. Diversifying your financing sources will allow your trucking company to get the right financing to meet the needs of your business and protect it from possible downturns.
Finding the right source of funding is essential for any firm. Doing otherwise may have your trucking company locked in repayment terms that will limit your growth for many years.
Each of the financing options listed above has its upsides and downsides. Consider them carefully and speak to a qualified financial advisor if possible.