The trucking and transportation business can provide great returns on investment, but the business also requires high start up costs and capital investment. Whether you’re trying to start a trucking business or expand an existing fleet, you’ll need deep pockets.
The high expenses are related primarily to the cost of fleet vehicles and can also include the cost of the hardware and software needed to run the business.
The upside of that outlay of capital cash is the return on the investment. And as business continues to grow, you may be ready to expand with additional fleet vehicles, trucks and trailers. And additional cost.
What’s the best way for transportation companies to fund the expansion and additional capital expenditures? There are plenty of options out there for you to fund the growth of your business.
One of the more straightforward options, a loan from a bank, will help you to cover the cost of additional trucks for your fleet.
Be prepared, however, for a long bank process that may not result in your favor. Transportation lending is risky for banks, so they will do their due diligence before providing a traditional loan for the purchase of vehicles.
Banks will take their time to analyze your business’s operational history, credit history and current financial situation before making a decision on the loan. This could take weeks or even months until a final determination is made.
If you have only been in business for a short time and have limited credit or operational history, it will be difficult to secure a typical bank loan, especially if you are looking at financing a number of vehicles.
Although they may be difficult for some small businesses to get, traditional loans offer some advantages. There have regularly scheduled payments with a fixed interest rate so you can plan appropriately for repayment. And a loan will help you build your creditworthiness for future needs or expansion.
Financing through Title Loans
If you already own a fleet of vehicles and you’d like to add more, you could consider using that fleet as collateral to borrow the needed funds.
With title loan financing, you secure funds based on the value of your current vehicles. The vehicles are used by the bank as collateral for the loan, and you receive the cash you need to purchase more vehicles.
These types of loans are typically easier to secure than a traditional loan. Because you are able to use your current vehicles as specific collateral, a lender may be more willing to provide the loan even if you have bad credit.
There are risks involved in title loans. Typically the interest rate is low if the loan is paid off quickly. But the longer term of the loan, the higher the interest rate climbs.
If your business defaults on the loan, you will lose the vehicles you provided as capital. This type of financing can be risky, especially for small businesses that can quickly face cash flow problems.
If your business has enough outstanding accounts receivables, you may be able to use those invoices to finance your expansion.
Instead of waiting for your customers to pay their invoices, invoice factoring allows you to immediately collect on your outstanding invoices. Financing companies provide a percentage of your invoices up front for a fee.
Invoice factoring allows you to use your accounts receivable to get cash quickly. This can help to raise the capital you need to expand your business.
Businesses should be cautious in using invoice factoring to fund large capital expenses. Payments are a large part of the cash flow equation. If you use your receivables for capital, you will not have your regular cash inflows, which may make it difficult to cover typical operating expenses.
Other Financing Options
There are many other financing options out there depending on your business’s financial situation.
One option may be to use a line of credit to fund your capital expenses. With this type of financing, you secure a loan from the bank up to a certain amount. You can use all of the funds or a portion of the funds as you need them.
Working capital advances are another relatively new financing option. Advances (loans) are provided based on your anticipated monthly revenue. This option is only good for those businesses that have established consistent monthly revenue.
One other avenue to consider is online lenders. Most offer financing options similar to traditional banks, but the process is more efficient and streamlined. What may take weeks or months with a traditional bank can typically be done in a matter of days with an online lender.
Do your homework and talk with the professionals to find the best financing options to expand your business. There are plenty of options to choose from if you take the time to find the one that meets the needs of your business.
Roger Grinnell is a freelance writer that primarily writes about small business finance and alternative lending. You can view more of his work at FactoringJournal.com