Managing your funds in the volatile world of trucking and transportation can be challenging. Costs are variable, work is unpredictable at times, and much of what you do is dependent upon the efficiency and availability of others. Cash flow can be restricted during down periods, and having a business line of credit to offset those instances can help stabilize a freight business and put you in a position to grow. Here, we’ll dive into ways that you can apply a line of credit to your business growth.
Why choose a business line of credit?
First things first, it’s helpful to understand the difference between a line of credit and traditional business loans. Loans are a familiar financial vehicle that are offered by banks, credit unions, and online lenders. The amount borrowed is fixed, as is the interest rate. In the freight industry, banks are somewhat reluctant to offer loans without some type of security or collateral.
Collateral is defined as a “hard asset” that the company owns outright. If you’re a smaller operator with a single vehicle, that might mean putting up your truck as security when you take out a loan. Defaulting on that loan leads to the bank seizing the asset—i.e., your truck—and, just like that, you could be out of business. No one wants to put themselves in that position if it can be avoided.
Unsecured loans, on the other hand, don’t require collateral. For that reason, lenders might exercise more caution when it comes to approving the loan. Unfortunately, most banks view freight companies as high risk right now due to uncertain economic circumstances, so unsecured loans are hard to come by. Business owners in the industry are being forced to seek out other sources for funding, and that’s where business lines of credit can come in.
A business line of credit (LOC) works differently than a loan. Instead of borrowing a set amount, the business owner can withdraw only what they need and pay it back all at once or in reasonable monthly installment payments. Interest rates are generally variable, based on the prime rate at the time the money is withdrawn.
LOCs can be secured or unsecured, and the approval process can vary. Alternative lenders may look at business revenue, accounts receivable, credit card receipts, and business longevity when determining how much your business can access. Your business credit score can also be a big determining factor in getting approved, and in some cases, your personal credit can play a role as well.
How to grow your trucking business with a line of credit
There are distinct advantages to having an accessible line of credit that you can tap into when times are tough, but LOCs can also be used for growth and expansion. Costs for those endeavors tend to be variable, so a line of credit is the perfect financial instrument if you want to grow your business. Here are some examples of places where your LOC funds can support your business:
Reserve fund for fuel costs
Unless you’re running electric vehicles, you’ll need gas to ship anything out the door. Ideally, you’d want to build a cash reserve fund for fuel before planning any expansion, but that may not be possible. A line of credit can provide the purchase power necessary to fuel your trucks only when needed. It’s a variable loan to cover a variable expense.
Vehicles and equipment leasing
The same concept can be applied to leasing vehicles and equipment. The need to add additional resources for a new customer might be short-term or long-term. Many freight company owners choose to lease rather than buy and use the line of credit to cover that cost. This also helps span the gap between delivery and payment, a common dilemma in this industry.
Maintenance on an expanded fleet
Expanded fleets, even when leased, require a larger maintenance crew, along with the equipment and supplies to support them. Not to sound like a broken record, but this is another variable expense that should be covered by a variable funding source. Have your accounting department build a budget that calculates the ROI on doing this.
Operating and administrative expenses
Maintenance is required when the trucks are making deliveries. Operating and administrative expenses are bills that need to get paid even in down times. Growth will never be possible if your company can’t survive the lean months when business slows down. A business line of credit can keep you afloat until things turn around.
Marketing and advertising costs
Growth for a freight company happens by adding more customers and distributors. They can’t find you without marketing and advertising. One strategy for this is to run a few tests so you can calculate the conversion rate on each ad you plan to run, then use the LOC to fund a marketing campaign. There’s a great book called “Running Lean” that explains how to do this in greater detail.
EV conversion strategies
Survival for many freight companies may require EV conversion. Fuel costs are compressing margins and making it harder to compete, particularly for those doing business internationally. Converting to electric vehicles is going to take some numbers crunching and some serious capital. A business line of credit might be the best option for the latter.