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.
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.
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.
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.