Tag: financing

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Equipment

5 Effective Ways to Finance Your Semi-Truck

Red Truck
Finance your semi-truck

Owning your own business comes with its own challenges. From acquiring and retaining customers to keeping your fleet on the road and financing new trucks and semi-trucks to keep your business running, you can expect a plethora of challenges. 

Vehicle acquisition and is certainly one of the biggest elements for a fleet management company. Financing a semi-truck to add to the fleet will ensure business continuity as well as business expansion. You will be able to expand your business into new territories and serve more customers with the addition of a new vehicle. But a new semi-truck means added expenses to your company. And we all know that a new semi-truck can come with a huge price-tag. 

So, we thought we would take a look at the ways that you can go about financing a semi-truck to add to your fleet. Whether it is the first vehicle that you are purchasing for your start-up, or whether you need to expand in tough financial times, we unpacked the ins and outs of financing. We took a specific look at semi-trucks and leasing, and how leasing a semi-truck could be your best option to expand your business. 

Take Your Needs Into Consideration 

The first thing you need to do is create a blueprint of your business. Where is it currently standing, what is your current financial situation, and what are your goals for the next year to five years? This overview will allow you to map out your future needs and decide what your business needs going further. 

If your strategic trajectory for the next five years is to expand and take a competitive standing in your industry, you will need to factor new equipment and fleet into your long-term plan. This will give you time to plan ahead and budget for the new semi-truck which you will need to service your increased client base. 

The next thing to consider is your risk appetite. If you are a new business with start-up capital and a somewhat inexperienced team, your risk appetite will be a lot lower than that of a long-standing business. This will mean that you will not be able to take large financial risks, and your expansion will need to be a lot more calculated. 

A large purchase like financing a semi-truck could assist your company with expansion in the long run, but, it could put immense strain on your company, especially in difficult economic times. 

Weigh Up Your Semi-Truck Financing Options 

The next thing to look into is how you will actually finance your semi-truck. There are a few options that you can choose from, each having vastly different impacts on your business. 

You can firstly buy the vehicle cash. This will mean that you have full ownership of the semi-truck, and you can list it on your financial statements as an asset of the company. Buying cash will mean that you do not need to continue monthly payments as it is a once-off payment. The problem with buying equipment and large assets cash is the fact that not many companies are actually able to put down such a large sum of cash at once. 

Especially if you are a start-up company, having enough working capital to buy new equipment cash is virtually impossible, and also hugely risky to the company. 

Working capital in your business should be used for the day-to-day operations of the business. Things like rent and wages should be included in your working capital, together with buffer savings for when unexpected events take place. 

Take COVID-19 for example. The global pandemic which has swept the globe has taken millions of companies by surprise and they have had to operate on a severely reduced income and rely on their working capital to keep afloat. 

This is where leasing comes in. Leasing a semi-truck is a far less risky option for your company as you are able to spread the payments out over a period of time. These reduced monthly payments can be divided into achievable monthly sums where you can actually make use of the vehicle. 

You can approach a leasing company and negotiate a lease that will work for both companies. In most cases, when it comes to financing a semi-truck, you can negotiate the lease duration, interest rates, and added benefits that come with the lease. Lessors are more likely to provide financing to companies, especially start-ups, as they use the semi-truck as collateral in case of non-payment.

Choose Your Leasing Option 

If you have decided to go with the leasing option, the next thing to look at is what type of lease you would prefer and what would work for your company. There are a number of different leasing options to choose from, with two highly popular options which we shall expand on. 

Operating Leases

An operating lease is the form of financing option in which the company never actually owns the equipment that they are leasing. The lessor will have ownership rights to the equipment throughout the period of the lease, as well as at the end of the period. 

Operating leases are especially handy in cases where the equipment that is being leased has a short expected lifetime and where a company will want to upgrade to the latest technology frequently.

Take office equipment like laptops and printers into consideration. These are perfect examples of technology that is constantly evolving. After around two to three years, you will want to upgrade your technology to not only have faster equipment and replace redundant technology but to maintain competitive standing. 

Companies who choose an operating lease can either choose to re-lease the equipment, return it to the lessor and lease newer technology, or even offer to purchase it. This is not as popular in the case of operating leases and is more common in capital leases. 

Capital Leases

These are also known as finance leases as well as $1 buy-out leases. In the case of a capital lease, the lessor will lease the equipment for a period of time, with the monthly payments, and thereafter buy it from the lessor. 

A residual amount is usually added to the contract for the end of the term for the company to actually make the purchase. This can be anything from the equivalent of the remaining life-time value of the equipment to simply $1. Money has to be exchanged at the end of the term for the lessee to become the owner of the equipment. 

Capital leases are more popular when financing equipment with longer expected lifetimes, like trucks and semi-trucks. These, compared to laptops and office equipment have an expected lifetime of five years and more, and it will make sense in the long-run to eventually own the equipment. 

Work Closely With Your Financial Advisor and Tax Consultant 

Depending on which option you choose to finance a semi-truck, you will need to know how it needs to be recorded on your financial statements and in your books. Buying a semi-truck outright will be recorded differently from if you are leasing it, and even then, there are differences when it comes to different types of leases. 

If you have decided to go with the cash purchase option, it will be recorded as an asset on your financial statement and will be recorded as a debit and credit of the same amount. 

It is also important to know that you need to also keep depreciation in mind as you will actually own the vehicle and because this will be producing an income for your company. Recording the depreciation is somewhat simple, you will just need to know the expected lifetime of the semi-truck. In the case of vehicles and trucks, they are usually given a five-year lifespan, so you can divide your purchasing price by five and list that as your depreciation amount. 

Leasing is recorded completely differently, however. In the case of capital leases, because you will eventually own the semi-truck, you will be listing it as a credit, however, you will not need to take the depreciation in mind until you actually own the semi-truck. 

Operating leases are in a totally different league of their own. Think of how you record rent on your financial statements.  it will not be conveyed on the balance sheet and will not be considered a company asset. Operating leases are recorded as expenses on the financial statements and are also expensed on the income statement. It will therefore have an impact on both the net income as well as the operating income of the business. 

The next thing to consider is the impacts that it will have on your tax. Leases are considered tax-deductible as “ordinary and necessary” business expenses and can be written off to tax. In the case of operating leases especially, where you do not need to take the depreciation of the semi-truck into consideration at all, it will not be considered a debt, and you can also look into writing off the interest. 

If you work together with your tax consultant and financial advisors, you can get enough of the monthly payments written off that you could end up spending very little on the financing of your semi-truck. 

Take time to consider your financial reporting. Your financial statements will be closely scrutinized by investors and future creditors, and leases are especially attractive on the balance sheets to both. Not only are you less of a risk to both, but they will be able to confirm business expansion and continuity with the monthly expenses. 

Shop Around For The Right Financing Company

The last bit of advice that we have to offer is to ensure that you get the right financing company on your side. Not only will you need a transparent and reputable company to provide you with financing options to lower your risk, but you will need to consider them partners. 

A good financing company will actually take your needs and unique company position into consideration when providing you with a lease for your semi-truck. They will also have in-depth knowledge of the industry and be able to pinpoint where the risk lies for the company and understand the industry and the market. Should the market be fluctuating, for example, the financing company should have in-depth knowledge about this and be able to guide you in the right direction. 

Consider also hiring a company that will be negotiable when it comes to your leasing terms. From the interest rates to the duration of the contract, a good financing company will be able to structure a package around what your company needs and requirements are. 

Take the added costs into consideration too. Elements like maintenance, insurance, transport fees, and licensing fees can also be included in the lease agreement should you negotiate with the financing company. This might be a bit trickier in the case of a capital lease, but, it will be incredibly beneficial in the beginning stages of your lease agreement. 

Maintenance plans are especially important in semi-truck financing, so even if you negotiate the first few years with the lessor, make sure you include a maintenance and service plan in your budgeting. Not only will it save you money in the long run, but it will extend the lifetime of your vehicle. 

Wrapping Up

Financing a semi-truck can be a big decision to make, especially if you are a small company with little working capital to back the expense. But, with the right company behind you, together with a knowledgable and expert financial and tax consultant, you will be able to add the semi-truck to your fleet and ensure your business continues to run and expand according to your set goals. 

Spend time doing research into the right semi-truck for your needs and take energy efficiency into consideration. If the budget is tight, you will want to spend less on the running of the vehicle, and that will cost you less in the long run as well. 

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Equipment

Equipment Financing for New Businesses

Excavator machine
Equipment Financing for New Businesses

Kicking off a new business can be an exciting yet daunting task. Some of the biggest challenges for new businesses are the start-up costs and getting enough capital together to get the business off the ground. A key expense in a business is the equipment that actually allows the business to function. 

Equipment makes up the top three biggest costs in the business, the other two being manpower and rent. Depending on what business you are starting, equipment can take up at least 56% of your startup costs. Hospitality and restaurants, construction, and fleet make up some of the most expensive businesses to kick-off, with technology start-ups being a bit lighter on the pocket than these industries. 

So, what do you need to know about equipment financing, and how can you work it into your strategic plan? We broke down how you can go about finding the right solutions for your equipment, which options would work best for your company, and the advantages and pitfalls to watch out for when acquiring new equipment. In particular, we are going to be unpacking equipment leasing and how it can benefit your company. 

Take Your Finances Into Consideration

The first thing you are guaranteed to look at is just how much you have to spend on equipment. Being a new business or start-up, your capital is most likely going to be somewhat limited for large purchases. The working capital that you do have in hand should be used for day-to-day operational costs like your rent and wages and in case of unexpected expenses and drops in initial cash-flow. 

Take into consideration the impact that COVID-19 had on businesses globally. Many businesses did not have enough working capital in reserve for the halt in income. This meant that their day-to-day expenses could not be met and excessive lay-offs were seen, while hundreds of thousands more shut their doors entirely. 

Leasing allows you the option to not use this vital working capital for large expenses like equipment. It provides you the opportunity to work it in as monthly payments for a duration of time that are manageable and less financially risky to the business. 

Do You Have A Credit History?

If you are looking at asking for credit from a financial institution, one of the things to keep in mind is your credit history. Due to the fact that you are a new business, the business is not expected to have a credit history that financial institutions can refer to to provide you credit. Leasing companies are less stringent when it comes to that. 

Because they use the equipment as collateral, they are more likely to sign a contract with a new start-up business. Should the company default on the payment, they simply need to take the equipment back. This means less risk for them as lessors, but as a lessee, you will still need to continue honoring the contract. 

Leasing companies are also more likely to take the business owner’s credit history into consideration when signing the contracts. This provides more security for the lease for both parties, and can also lower the interest rates of the monthly lease payments. Remember, the more risk you are, the higher the interest you are likely to pay. 

Work Out Your Options 

The next thing to look at is what actual equipment financing options you have available to you. Much of this will be determined by what kind of equipment you will be needing. If you are looking for equipment with a long lifespan, you will be looking at a totally different option than you would be for equipment that becomes redundant quickly. If you would also like to eventually own the equipment, there are also options in leasing for that. 

Let’s look at an example. Things like printers and laptops are office equipment with a useful lifetime of around two years. After that, they start to become redundant as technology evolves and more sophisticated and useful versions are launched. Buying this equipment will, in the long run, simply cost you more as you will be replacing the equipment frequently. You will also have to dispose of the equipment correctly, which can also be a cost burden to you. 

In these cases, operating leases could be your best option. An operating lease is a contract in which a lessor provides the lessee equipment at a monthly rate for a set duration of time, after which, the equipment is returned. The lessee can choose to upgrade at the end of the term, cancel the contract completely, or, if need be, re-lease the equipment. 

A capital lease, on the other hand, is more suited for equipment with a longer lifetime value. These leases usually come with a residual, or in some cases, a $1 buy-out in which the lessee can take over ownership of the equipment. This is one of the less risky, and most affordable way to eventually own the equipment you need to operate your business. 

What Extra Costs Can You Afford?

When it comes to equipment, you need to take other costs into consideration, further than just the overall outlay of what it will cost. Equipment will come with a plethora of extra costs that you need to take into consideration when signing a lease. Take maintenance, insurance, licensing fees, transport fees, import fees, and even training into consideration. These are all associated costs that come with the purchase of equipment. 

Equipment financing can take some of those risks off you. In operating leases especially, where the lessor will always own the rights to the equipment, these costs will be factored into the lease and covered by them. 

Think back to that printer, for example. The leasing company will be responsible for the regular maintenance and repairs of the printer, as well as the insurance of the equipment. The lease will include the leasing company delivering the equipment and providing a consultant to train your staff on how to use the new printer. 

It might differ in capital leases, however. Because you, as a lessee will eventually be owning the equipment, you could be responsible for these costs. The insurance and maintenance will most likely be your responsibility throughout the duration of the term. However, if you can, you could potentially negotiate them to be included in the terms for a period of time. Leases with maintenance plans added on is the optimal equipment financing option for most companies looking to acquire equipment. 

How Will It Impact Your Books?

This is a key aspect of equipment financing and choosing the right option for your business. If you purchase new equipment cash, you will be reporting it differently on your financial statements than if you are financing it. 

Cash purchases are recorded as an asset on your financial statement and will be recorded as a debit and credit of the same amount. But, because you are the sole owner of the equipment, and it will be generating an income for your company, you will need to take the depreciation of the equipment into consideration. Say, for example, you are purchasing a truck with cash to start your fleet management business. Vehicles and trucks have a five-year lifespan; so divide your purchasing amount by five and include that on your financial statements as your depreciation amount

Leases are completely different and will have less impact on your balance sheet. Operating leases, in particular, are less risky. Because you will not be owning the equipment, it will not be recorded as an asset. It will rather be recorded as a business expense on the financial statement and expensed on the income statement. So, think of a lease as rent, which is recorded similarly. You will not need to take the depreciation of the equipment into consideration either and impacts both the net income as well as the operating income of the business.

Think of Taxation and Future Financing 

Leasing comes with extraordinary tax benefits. Because they are recorded as expenses to the company, you can claim back from tax for your equipment financing. Operating leases, in particular, are recorded as “ordinary and necessary” business expenses, and can be written off to tax. 

Because an operating lease is not recorded as an asset and because it is a debt for the business, that debt is fully tax-deductible. If you go further, the interest on your lease can also be written off. So, before you simply jump into a lease agreement, get some advice from a tax consultant and work out the best agreement with the lessor. You might find that most of the financing for your equipment can be written off. 

Lastly, consider the ramifications of new equipment when it comes to investors and future lines of credit. Remember, credit providers and investors will be looking at your financial statements to determine your risk and creditworthiness. Leasing allows more room for future credit lines in the future. Investors will also determine that the monthly expense of equipment is less risky for them and will most likely be more open to investing in you. 

Last Thoughts

The last thing you should take into consideration for your new business is who you choose as your equipment financing company. Because the equipment is going to play a large role in your business continuity, as well as be a long-term expense for you, you will want a company that will work together with you. Financing companies need to be considered partners rather than just lessors. You will want them to take your unique business needs into consideration, ad structure a deal that suits you. 

They will also need to be reputable and experts in their industry and be able to advise you on any pitfalls and challenges that you might come across. Knowing the trends and fluctuations in the market will also be important as they might pose a risk for you, so get someone on your side to make sure you make the right financial decision for your business. 

Categories
Equipment

Truck Financing: 4 Essential Things You Need To Know

The transportation industry can be an incredibly lucrative business to get into, especially for new entrepreneurs. It is an indispensable economic activity, that even with the evolution of technology, and growth of digital dominance, we cannot do without. 

Freight and logistics still make up the largest portion of the transportation industry, with 35% of the full transportation market share belonging to trucking. 

Despite the return of the logistics industry being high, starting out a new business comes with its challenges. High competition rates have been flagged as one of the biggest setbacks of starting a freight company, while the second biggest challenge is the high start-up costs. 

The costs of the trucks, trailers, and flatbeds are phenomenal and without large working capital, it could be daunting for business owners. 

There are, however, various options available to companies for them to acquire the much-needed equipment they need to run a successful business, without putting down a huge cash payment. We took a look at the world of truck financing, and how you could take advantage of it to launch, manage, and grow a successful trucking empire. 

Know What Your Options Are

When entering the world of fleet and trucking, the first thing you will need to consider is what finance options you have available to you. In most cases, companies do not have the initial working capital to simply purchase trucks or fleets of trucks. 

Even if you do have a lump sum available to you, it’s more advisable to rather keep that working capital for day-to-day operations like wages, rent, and in case of economic downturns. 

Financing can assist you in acquiring the equipment you need to get your fleet on the road with little initial output and to start growing your business relatively quickly. You will rather be paying a monthly installment over a set period of time. 

There are a few financing options available for you to consider. 

Loans 

Let’s start off with loans. You can choose to acquire a loan directly from the dealer that you are purchasing the truck from, through a bank, or a reputable financing house. A loan should be considered when you want to own the equipment at the end of the term and is ideal for something that will hold its value long beyond the actual term. So, for something that depreciates very quickly, this might not be your best option. 

The other thing you will need to consider about a lease is that the interest is amortized throughout the term. That means that you’re paying more interest at the beginning and more principal at the end.

Leases

A lease is ideal for something that does depreciate quickly and that will not be worth the full value at the end of the term. If you are looking for equipment that you will need to upgrade at the end of the term, this is the option for you. 

There are also two primary types of leases that you need to be aware of. One is a capital or $1 Buyout lease, which allows you to take over ownership at the end of the term. The other is an operating lease which states that you will either have to return the equipment at the end of the term or re-lease it if you need it for a longer period. 

Leases offer fixed finance charges that are factored into the monthly payment and will not waiver over the period of the lease. Part of the fixed monthly payments are soft costs like maintenance, insurance, installation, and training if it is required. 

They are non-cancelable and the equipment being leased, like the truck, is held as collateral in case of default, and can be collected by the lessor in such a case. 

What You Need For Your Business

Now that you know what financing options you have available to you, the next thing you need to look at is what your business actually requires. We highly advise that you set your short-term and long term goals, and create a blueprint for the strategic direction of your business. 

You will need to consider the types of trucks you will need for your business. Are you looking to have a full fleet? Do you want delivery trucks, flatbed trailers or custom dry-vans? Or are you looking more at the construction side and looking for dump trucks and transfer trailers? Having this in place will help you with your application for financing. 

The next thing to consider is your budget. Even though you will be spreading the costs out over a number of months, you will need to factor that into your monthly operating costs. If you are taking a capital lease, you will also need to budget for the residual cost at the end of the term if you want to actually own the trucks.

The last thing you will need to consider are the companies who will be financing your trucks. You will need a company that not only has a good reputation, and who is trustworthy, but a company that will work with your specific needs. Keep in mind that each company has a unique set of needs, and you will be partnering up with this company. If they can assist and guide you through the process, highlighting risks, you will be able to benefit from the financial partnership. 

What is Needed of You for the Financing Company

The next thing to look at is what you will need to prepare for the financing. The first thing that you will need to consider is your credit score. In many cases, especially with a new start-up company that has not had lines of credit, a credit score does not exist for it. 

In these cases, a financing company may take the owner’s credit score into consideration, however, in most cases, leasing may be a good option for new companies. Most lessors, due to the fact that they are using the equipment as collateral, are more open to providing a lease to a company with no credit score. 

If your company has a bad credit score, it is highly advisable to disclose that at the early stages of the application. There are a number of online lenders and companies who will be able to assist you with financing, despite a bad credit score. In these cases, you might find yourself paying a bit more interest and fees. This could work out for you in the long run as you can keep your fleet on the road and keep income coming in to rectify your credit history.

Make sure you know exactly what documentation you will need for the application. In some cases like loans and capital leases, you will need to have the insurance instated prior to taking the truck over. You will also need to have all of the details of the truck in your possession for legal purposes. 

Lastly, if a downpayment is needed for the contract, ensure that you have that ready when you sign for the truck. Without that, you will not be able to drive it off the lot. 

How Will It Impact You Financially?

One of the most important aspects to consider about taking trucking finance is what impact it will have on your finances. How will it be recorded on your balance sheet? Are there any tax benefits? Will you be able to get more credit with the current finance. 

Let’s take a look at a lease first. A lease has several benefits to an organization due to how it is recorded. Keep in mind that an operating lease and capital lease are different, but primarily, the lease is seen as an operating cost to the company and is listed as an expense. It is usually also listed as a liability due to the fact that it is depreciating, but the depreciating cost is not taken into consideration. 

There are also incredible tax benefits for a lease. If you work it correctly, you can write off all interest on a lease to tax, and in some cases, if you hire a great tax consultant, a lot of the costs of the lease too. In essence, you can actually make up for a lot of the costs spent on the lease. 

Because this lease is also seen as an expense, it opens up other lines of credit for you with other lenders and banks. A loan, on the other hand, ties up that credit line and is limiting for more borrowing and investment. It is more of a financial risk to your company because it will not provide as many tax benefits as a lease would. 

Wrapping Up 

In order to decide what kind of financing to sign for, ask yourself these questions: How long will you need a specific truck for? Will you need to upgrade it in a few years? How much cash do you have for an upfront deposit, if any? A trucking lease will allow you to invest much-needed cash and credit into other areas of their business. It will also guarantee you a flat rate and a consistent interest rate with no down payment needed. Lastly, when you need to upgrade, a lease will make it easy for you to move on to less obsolete equipment and ensure a top-of-the-line fleet for your company.