How to Secure the Best Commercial Truck Loans and Semi Truck Financing
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How to Secure the Best Commercial Truck Financing: A Complete Guide
With the rise of online shopping and more distribution centers dotting the American landscape, the need for commercial trucks and vehicles is growing. Commercial trucking companies and the individuals that own them serve a critical need in the American economy. They facilitate the transport of raw materials, finished goods, food, and other products between manufacturers, stores and consumers. Overall, trucking is a big business, generating on average $700 billion in revenue each year. However, in recent news, the American Trucking Association, predicts the industry will need 100,000 drivers in the next five years–and 160,000 drivers by 2028.
As an entrepreneur you may be excited to jump right into the business and get started, or even expand your current truck operations to take advantage of all the opportunities out there. Either way, doing so will require capital to purchase more commercial vehicles and semi-trucks. Unless you have a lot of cash saved up, and even if you do have cash for payment, it’s important to know what types of loans and financing are available to acquire commercial vehicles and semi-trucks. This comprehensive guide will walk you through commercial truck financing, semi truck financing, fleet vehicle financing, and business loans centered on transportation.
Compare the Best Commercial Vehicle Financing Options
$1 Buyout Lease
10% Option Lease
10% PUT Lease
Operating / Fair Market Value Lease
Semi Truck Financing
Intend to buy equipment, but spread the cost out over time in equal payments as opposed to a large lump sum at the end of the lease term.
Option to purchase equipment or not at end of lease term
If owner has full intention to purchase equipment at end of lease period
When leasing a new Truck / Equipment every few years
Businesses just starting out and looking for flexible options
Business interested in financing semi trucks, large rigs, and 18 wheelers
Type of Lease
Capital, referred to as B, C and D programs at Neal Funding
referred to as B, C and D programs at Neal Funding
Capital or Operating
Capital or Operating
More than 75% of vehicle life
More than 75% of vehicle life
More than 75% of vehicle life
6 months to 7 years
6 months to 7 years
Deduct up to $1 million of the equipment costs with Section 179
Appear on borrower’s balance sheet
Lessee builds equity
Deduct up to $1 million of the equipment costs with Section 179
Appear on borrower’s balance sheet
Immediate ownership at end
Predictable cash outflows
Lower monthly payments
Owners can negotiate
No mile, excessive wear fees
Lenders may build in cost and maintenance
Higher monthly payments
High rates to protect lender
Potentially large lump sum of lease end
Lender may not renew
Large lump sum payment at end of period
Can only deduct monthly payments as an operating expense
As an operating lease no equity building
As a capital lease, higher monthly payments
Larger down payments (averaging 10%)
Limited to semi trucks
Highest monthly payments
How Commercial Truck Leases are Structured
Commercial truck leases are structured similarly to personal car leases. However, instead of having the option to simply buy or lease commercial trucks; you have more options of which the main options are a capital lease and an operating lease. As commercial vehicles and semi-trucks are expensive, using one hundred percent of your own funds for the purchase of such equipment does not always make the most economic sense and can be a huge burden to your businesses cash flows.
With both capital and operating leases it is possible for operators to obtain a commercial truck with 100% financing, or no money down. This allows the borrower to direct money that would have otherwise been spent on the truck to be used for other critical business purposes.
Under the structure of a capital lease, also called a finance lease, the commercial truck being financed remains in the borrower’s name. The lender finances the purchase of the vehicle, transfers ownership to the borrower, and is paid back in monthly installments over the life of the lease.
By keeping legal ownership of the vehicle, the borrower can access additional tax benefits, such as claiming depreciation each year and deducting interest paid each month.
Once the loan has been paid back in full and all other terms of the agreement fulfilled, the lenders release the truck from a financial obligation and the borrower will become the owner with a free and clear title.
Capital leases tend to have longer terms and are therefore helpful for commercial vehicle and semi-truck operators that do not require the latest technologically relevant equipment. When it comes to semi truck financing, capital leases typically are more than 75% of the useful life of the vehicle.
While there are options to put no money down, lenders will typically prefer to see at least 10% cash put forth as a down payment. This is the sole discretion of the borrower and their business needs.
Types of Capital Leases
Traditionally there are two main forms of finance leases, or capital leases: direct financing and sales-type leases. Capital leases are structured so that the lender purchases the equipment upfront, with their own funds, and then transfers ownership to the borrower who then makes monthly payments back to the lender.
As an example, here at Neal Business Funding we offer a Sale & Lease-back program. When a company does not have a strong credit history or documentation and needs equipment like a commercial vehicle or semi-truck, we purchase the machinery for them and allow them to make payments to us. Once the loan amount has been repaid, the company gains full ownership of the equipment.
In order for a lease to receive accounting and tax treatment as a capital lease, it has to meet at least one of the following four criteria:
The term of the capital lease is greater than 75% of the life of the subject commercial truck or vehicle.
Full ownership of the vehicle is transferred to the borrower at the end of the lease period.
The lender provides the borrower an option to purchase the asset at a reduced price.
The combined current value of all expected lease payments is greater than 90 percent of the truck’s fair market value. Meaning, if fair market value of a truck is $50,000, the present value of all future lease payments that the borrower will make must exceed $45,000.
From the perspective of a borrower, understanding the difference between direct-finance and sales-type lease, may be the difference between paying nothing at the end of the term period versus paying a large lump sum.
A sales-type lease is structured so that the lender generates income not only from the interest collected over the lease period, but also earns a profit on the commercial truck or vehicle being leased.
The profit earned is the difference between the selling price of the vehicle, and the cost to the lender to carry the asset over time. This may initially sound counter intuitive, but the cost of an asset increases over time because of depreciation.
Over time, lenders can depreciate the asset, which decreases the actual cost of the equipment for them from a tax and accounting perspective. Therefore, as depreciation accumulates, the difference between the cost of the vehicle and its actual value increases in a direction profitable for the lender.
With sales-type leases, manufacturers or dealers extend this financing directly to borrowers, as the cost of the vehicle to them will be much lower than fair market value of the vehicle being financed. This can be an advantageous capital lease structure should your business require the use of trucks with rapidly changing technology or equipment standards. These types of vehicles reduce the need of borrowers to carry large inventory and assets doomed to become obsolete within a few years.
With a direct-finance lease, the lender only earns a profit on the interest generated from the borrower using the equipment. Monthly payments are tied to the value of the asset on the date it was purchased, plus interest.
Under a direct-finance lease the lender retains sole liability for the commercial truck or vehicle, therefore; the borrower cannot take advantage of certain tax benefits of the vehicle such as depreciation.
The lessor most likely will not be the manufacture or the dealer, but rather a commercial vehicle leasing company, besides alternative lenders like Neal Business Funding.
A $1 Buyout Lease
With a $1 buyout lease, a borrower makes monthly rental payments for unfettered access and use of the commercial truck or vehicle. At the end of the lease, the borrower then has the option to purchase the equipment for as little as one dollar or a small nominal amount. The structure of a $1 buyout lease, in this respect, makes it very similar to a loan and therefore borrowers can expect to pay higher monthly payments than an operating lease.
These types of leases should be used if and only when the trucking company or owner-operator has the full intention of purchasing the equipment at the end of the lease term. The advantage of this setup is there is no balloon payment due at the end of the period or upon transfer of full legal ownership of the vehicle or semi-truck to the borrower.
$1 buyout leases typically have the most lenient underwriting qualifications and the lower end of interest rates ranging from 6 to 15 percent. During the life of the loan, not only is the equipment’s value paid back to the lender, but also the interest rates, which together must total at least 99% of the equipment’s initial value.
Another the major benefit of the $1 buyout lease is that it can depreciate the equipment on an accelerated basis under section 179 of the tax code and sometimes up to $1,000,000 within the first year of use.
For example, say you are interested in starting your transportation business, and wish to purchase a box truck valued at $10,000. Since you don’t have the funds immediately available, you apply for equipment financing with Neal Business Funding. After accepting your application they purchase the vehicle on your behalf. Neal Business Funding agrees to transfer the title of the truck to you, and in exchange you promise to pay back the $10,000 over the course of 4 years, as well as 6% interest or $50 a month. Your monthly payments will be $258.33 ($10,000/48 monthly payments = $208.33 + $50 per month in interest).
One of the main disadvantages to a $1 buyout lease is that it shows up on your balance sheet as a liability, and if you try to secure other forms of general business financing, like a line of credit or term loan, it will be negatively impact your debt to loan ratio.
10% Option Lease
Similarly, capital leases that provide borrowers the ability to purchase the equipment for 10% of its costs are called 10% option leases. As an example, under this lease structure, an individual owner-operator that secures financing for a $100,0000 commercial box truck at 5% interest, will pay $10,000 at the end of the lease period in order to purchase the vehicle from the lender, and roughly $417 a month over the course of the lease period.
As is characteristic of capital leases, the borrower gets certain benefits of ‘owning’ the equipment during the lease, such as derivative income tax benefits.
Additionally, one of the main reasons why a business, especially those just getting started in the trucking industry, would choose a 10% option lease over a $1 buyout lease is because the 10% down payment that will come at the end of the lease period. This down payment effectively lowers the monthly payment a trucking company or owner-operator would have to pay over the course of the loan. This can be helpful not only to manage cash flows over that period of time, but also in the event that the owner decides they no longer want or need that commercial vehicle or semi-truck. If they choose not to buyout the lease, they are not required to the 10% down payment and can simply walk away.
Since borrowers retain them right not to purchase the equipment at the end of the lease. 10% option leases typically have slightly higher rates ranging from 7 to 16%.
10% PUT Lease
A 10% PUT lease is a type of capital lease that finances 90% of the value of equipment over the lease period. Unlike a 10% option lease, a PUT lease requires the borrower to purchase the equipment at the end of the term period for 10% of its initial value.
Due to its very nature, this type of lease is highly restrictive. There are steep and costly early termination fees and prepayment penalties that may be close to the full cost of the equipment secured by the loan. As such 10% PUT Leases should be predominately reserved for borrowers with absolute certainty that they will purchase the equipment at the end of the financing term.
In exchange for providing lenders a guaranteed purchase, trucking companies will enjoy lower monthly payments, sometimes, even lower than that in a 10% option lease, ranging from 6 to 15%.
The main benefit of this lease is the extremely low qualification requirements. Owner operators and individuals just starting out in the trucking and transportation industry with the worst credit, little business history, and little documentation may still apply and be approved for a 10% PUT lease under certain conditions.
Furthermore, as transfer to the borrower is guaranteed, the lease functions similarly to a typical loan for tax and accounting purposes. Specifically, the equipment can be depreciated or deducted at the lessee’s option under section 179. In addition, interest payments can be deducted as an interest expense.
Operating Lease / Fair Market Value Lease
Operating Leases, also referred to as fair market value leases, require borrowers to rent commercial trucks and vehicles during the lease period.
At the end of a commercial vehicle operating lease, borrowers have several options how they want to move forward. Typically, lease agreements provide an option for the borrower to purchase the equipment outright for a reduced amount. Additionally, borrowers may have the option to renew the lease and continue using the same equipment. Last, borrowers can get a new lease with the same lender, and receive the latest commercial vehicle or semi-truck.
Because it does not include payments towards the purchase price of the truck in the monthly payments, operating leases have lower payments than other forms of commercial truck financing, including capital leases. This makes them most beneficial for companies with limited cash or just starting out.
However, similar to a lease on an apartment or home, there is no opportunity for owner-operators or trucking companies to build equity for the business. Once the lease term is up, they will have to re-apply and re-qualify for an entirely new lease, which can also cost more time and money in the long run.
Operating leases tends to be for shorter terms, no greater than 18 months, and are more often used for equipment that is continuously upgraded.
Types of Operating Leases
Under a full-payout lease, at the end of the lease period the borrower will not be required to make a balloon payment, or payment larger than the average monthly payments. The lender is paid monthly for all costs of the lease plus interest, and therefore has little concern for the expected future residual value of the equipment.
Full Service Lease
A full-service lease is a full-payout lease with the estimated cost of general maintenance, repairs, taxes and insurance built into the lease payment. Many lenders will offer a full buffet of additional benefits and services to borrowers under a full-service lease including dedicated maintenance, mobile service, roadside assistance, vehicle licensing and permitting, providing replacement rental vehicles during equipment downtime, fuel tax reporting, used truck disposal, regulatory compliance and even washes.
Having these services rolled into one payment can be especially beneficial for owner-operators looking to get into the business as quickly as possible, without having to worry about the overhead and ancillary expenses that come with operating a commercial vehicle. It is important to keep in mind that under a full-service lease, the lessee has no skin in the game. They will not receive ownership of the vehicle unless they take the purchase option at the end of the lease term.
Full-Service Equity Lease
A full-service equity lease allows borrowers to share in the equity of the commercial vehicle and receive the full benefits of servicing. Under this type of lease, borrows retain ownership of the vehicle in their name. However, similar to a full-service lease, predictable repairs and maintenance required for the vehicles is added into the monthly payments.
A TRAC lease is the most popular form of an operating lease available for borrowers seeking to obtain a commercial vehicle. TRAC stands for Terminal Rental Adjustment Clause. A TRAC lease adjusts the monthly rental payments based on the estimated market value of the vehicle at the end of the lease period.
TRAC leases are known to provide trucking companies and owner operators the greatest level of flexibility as they can be either a capital or operating lease depending solely on the borrower’s personal business requirements.
How it works is a lender and borrower agree to a specific TRAC amount, or estimated residual value of the vehicle at the end of the lease period. At the end of the lease term, should the lender regain ownership of the vehicle and subsequently sell it about the TRAC amount, they will owe the borrower the difference. Likewise, should the vehicle appraise or sell for less than the agreed upon TRAC amount, then the borrower will be required to pay the lender the difference.
Higher residual TRAC amounts equate to lower monthly payments. Vice versa, lower residual amounts mean a borrower will have to pay more each month.
One of the major benefits of a TRAC lease is it allows borrowers to better manage their monthly cash flows and negotiate for their best interests. This is very important in the trucking business as the industry overall is seasonal and competitive, especially for companies starting out.
Additionally, TRAC leases have much more flexibility in loan terms, as many features of the loan can be tied to a multitude of factors including depreciation schedules and ownership agreements.
The ultimate appeal of TRAC leases revolves around the termination at the end of the lease. Should a borrower choose to terminate the lease at the end of the contract term, they retain options to purchase the equipment, return it, or renew the lease with an entirely new commercial truck or semi-truck.
Similar to most business loans, TRAC leases also have a minimum required term. Should payment be received before the end of the term, it may trigger prepayment penalties. Many companies offer TRAC leases with no mileage penalties, excess wear and use penalties and will allow any custom additions or specialized customization a borrower chooses to make.
Types of Financing Available for Trucking Companies
Semi Truck Financing
Now, you may have noticed throughout this guide we have not been grouping semi-trucks in with commercial vehicles. While a semi-truck is a commercial vehicle, the financing for them is entirely different.
This is because of the business nature that a semi-truck is used for. Owner-operators and trucking companies use them to haul heavy freight loads across long distances, thus exposing them to a greater range of weather conditions and damaging elements. Semi-trucks require more consistent repairs and general maintenance to keep them at full operational capacity to keep the business going.
Semi-trucks and their related financing have a different level of risk that needs to be assessed in its own category, and the financing typically carries more stringent requirements.
Unlike conventional commercial trucks, semi-truck owner-operators and companies can expect to put as much as 10 to 20 percent down towards the purchase of a semi-truck.
Operating lease terms for semi-trucks are typically less than 75% of the residual value of the vehicle, meaning that there is a full expectation the vehicles will quickly wear down. Along with this, loans for semi-trucks can be as short as 6 months. However, for a lease in which the borrower is looking to receive full ownership of the vehicle at end of the term, and for standard semi-truck term loans, they can last as long as 7 years.
Smaller local banks and credit unions will not extend semi-truck financing because takes a higher level of underwriting beyond the typical vehicle loan. Most lenders for semi-truck financing are major institutional banks or individual specialized business lenders, such as Neal Business Funding.
Fleet Vehicle FInancing
Fleet vehicle financing options are commercial loans extended to trucking companies looking to add more vehicles to their business and operations. When you already own a commercial vehicle or semi-truck and are looking for a source of funding for one or more additional trucks, you will seek fleet vehicle financing.
Usually, operating leases are the preferred method if you are looking to expand a commercial fleet. These leases will provide borrowers unique and low cost access to the newest trucks every few years at the end of the lease term. This can save many operators and business owners a lot of capital that can be used in other areas of the business.
Loan terms are more favorable for fleet vehicle financing because borrowers are coming forth with an established credit history and because they do not tie the business to a single commercial vehicle.
With fleet vehicle financing, lenders can extend larger loan amounts, as much as $150,000 to $550,000, to accommodate for the cost of purchasing multiple vehicles. Also, loan terms and interest rates are more favorable as long as there is proven profitability of the business requesting the financing.
Fleet Vehicle Auction Lines of Credit
One common type of fleet vehicle financing is auction lines of credit. These are business lines of credit extended to companies looking to purchase trucks to expand their commercial fleet at public or private auctions. Because auctions bring a high level of uncertainty in terms of how much trucks end up selling for, auction credit lines provide the quickest form of capital that is also flexible.
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The Best General Business Trucking Company Financing Options
Term Business Loans
Business Lines of Credit
Business Credit Cards
Commercial trucks, working capital, equipment
Commercial Trucks, Equipment, Land, Facilities
Commercial Trucks, Heavy Equipment, Machinery
Commercial Trucks, working capital needs, payroll
Gas, fuel expenses, maintenance
Commercial Trucks, Equipment, working capital needs
Maximum Loan Amounts
$0 - $500,000 In some cases up to $5 million
$50,000 - $250,000 In some cases up to $5 million
$5,000 - $150,000
Up to value 70 – 80% value of the collateral
6 months -30 years
up to 10 years
Most competitive rates
Small or 0 down payments
Small down payments
Can be used at will
Fast approval Flexible Use
Quick Access to Capital
Long funding process
Higher interest rates
Subject to hefty credit card fees
Possible hefty late fees
Term loans are ideal for trucking companies that are just starting out or have been in the business for several years. The loans are very similar to small business loans and serve as a great source of funding for short to medium term working capital needs.
Term loans are the most intuitive form of financing. A lender provides a borrower a certain amount of cash, and in exchange, receives standard monthly payments to pay down the interest, principal, or a combination of both.
The actual size of a term loan correlates with the lender’s preference, but can range in size between $5,000 to $500,000 from alternative lenders and up to $5 million from major lending institutions. Major financial institutions and banks consider the transportation and trucking industry risky and because of this are sometimes hesitant to provide funding or will provide funding with very high rates.
To qualify for term business loans, trucking companies in nascent stages will have to prove their ability to cover monthly debt payments based on the personal credit scores and financial history of the owners. Companies with existing business history may rely more on their past profitability, years of experience and income to qualify.
Small Business Administration (SBA) Loans
SBA Loans are business loans that are guaranteed by the SBA. They relieve lenders from the high level of risk inherent in investing in trucking companies and semi-truck operations. These loans are ideal for owner-operators and businesses seeking to make large purchases or wanting to have a longer repayment period.
SBA loans can be customized for small to medium sized trucking businesses and individual owner operators. The Small Business Administration (SBA) is a federal government agency that guarantees if a borrower falls behind on their payments, the lender will still be paid for a significant percentage of the loan (typically 75% of the loan value).
Benefits of a SBA Loan
The main benefit of SBA loans is they offer some of the most competitive interest rates, on par with what can be found with traditional banks. Rates can range anywhere between five and eight percent. The SBA also takes it a step further by planning a cap on the interest rates approved lenders can charge on these loans.
SBA loans also enable borrowers to pay off the loan over a longer period of time. In some cases the repayment period can be as long as 25 years. This lowers the average monthly payment borrowers can expect to pay, and allows trucking companies to better manage their cash flows.
SBA loans typically require a smaller down payment from borrowers with financing available for up to 90% of the value of the assets being acquired.
In a recent article by Trucks.com, owner Jay Patel of West Coast Warehousing & Trucking leveraged his SBA loan to buy yard space, new trucks, and bring on more employees. With these measures, his company experienced a nearly doubling in business revenue, in as little as 4 years.
Types of SBA Loans
SBA 7(a) Loan
A SBA 7(a) loan is very popular among trucking companies, especially for those starting out or with very few years of business history. These loans can be used for a variety of uses including working capital needs, such as truck repairs, driver overtime; buying out competitors, and refinancing existing business debt. They can also be used to purchase new trucks, hire new drivers, and take on new routes. The average size of a SBA 7(a) loan ranges between $100,000 and $200,000.
SBA 504 Loan
A SBA 504 loan are traditionally a good source of capital for trucking companies with an existing business history. While the SBA 504 loan cannot be used for working capital needs, they can be used to purchase warehouses and commercial real estate. They can also be used to purchase equipment, including commercial trucks, fleet vehicles, and semi-trucks. SBA 504 loans are characterized by lower interest rates, as well as a higher loan amounts. In some cases as much as 5.5 million can be offered to the most qualified borrowers.
Business Lines of Credit
Business lines of credit provide owner operators and commercial trucking companies’ access to capital on a revolving basis. As transport is a very seasonal business, credit lines can be an excellent tool for businesses to manage their cash flows and pay for general operating expenses, despite reduced revenues during seasonal changes.
Business lines of credit are a form of financing that can provide the right type of flexibility and independence early stage trucking companies may like. A business line of credit is when a lender pre-approves a business to borrow funds up to a certain amount.
For example, if Joe Trucking is approved for a credit line of $100,000 within a certain time period, usually 12–18 months, he can request to borrow $50,000, $77,000, or even to the full amount of the credit line during that course of that time period. The lender will then make the amount available directly to his bank account in a matter of hours. Joe Trucking is then free to use the cash however he sees fit. He can pay for surprise expenses, purchase new equipment, or even acquire commercial vehicles and semi-trucks.
With a business line of credit, a borrower has a piggy bank they can reach into with the condition that any money the borrower uses, must be paid back with interest. The beauty of a business line of credit is you only pay interest on what you borrow and will not be penalized should you pay off your balance right away. Very similar to a credit card, if Joe uses $60,000 in funding to start and then pays it back in two months, Joe will still have access to $100,000 for 10-16 months depending on his term.
Types of Business Lines of Credit
Secured Lines of Credit
Secured lines of credit are considered ‘secure’ and ‘safe’ to lenders because borrowers are required to put up assets as collateral. Collateral assures a lender that if a borrower defaults on their loan, they can seize those assets to recoup their money. As a result, borrowers tend to have access to larger loan amounts with secured lines of credit. Secured lines of credit can run as high as $5 million depending on the borrower.
For trucking companies with an existing business history, lenders like to see existing commercial vehicles and semi-trucks used as collateral. For owners just starting out, lenders will look to see if the borrower has been in the business at least six months and generated around $25,000 in revenue before processing a line of credit.
Unsecured Lines of Credit
Unsecured lines of credit do not require the borrower to put up any collateral. Lenders look solely at the owner’s personal credit scores, financial documentation, and ability to repay the loan before determining a credit line amount. The lack of collateral makes unsecured business credit lines inherently riskier, which is usually reflected in smaller loan amounts made available to borrowers. Typical unsecured loans amounts range from $10,000 to $50,000.
Asset-based financing allows individuals and trucking companies at any stage of development to use business or personal assets to qualify for business loans. This financing takes many forms and can provide quick access to large amounts of capital at favorable terms. On a personal level, these assets can be their primary home or residence, a personal car, or even cash on hand. At a business level, physical assets such as machinery, inventory, and commercial trucks can be leveraged.
In this respect, asset-based financing shares many of the same qualities of secured business lines of credit. The main distinguishing feature being, unlike credit lines, asset-based financing will also take intangible assets, such as invoices and accounts receivable as a consideration for backing the loan.
Rates for asset-based financing average anywhere from 10 to 25 percent, with loan amounts directly related to the value of the asset. For example, an owner-operator who bought a semi-truck two years ago for $65,000 that appraises for $150,000 due to good condition and custom modifications, may be able to secure a loan equal to or greater than $150,000.
Types of Asset Based Financing
Merchant Cash Advances
Merchant cash advances are commercial loans in which the borrower sells off a percentage of future sales or invoices at a discounted rate. As an illustration, let’s assume a lender provides Joe Trucking Company a cash advance of $75,000, which Joe can immediately use to purchase a truck or commercial vehicle to begin operations. With every payment Joe receives from his customers, a small percentage of that revenue is immediately re-directed to the lender to pay off the loan amount.
Interest rates for merchant cash advances are typically called factor rates. Using our same example above, a $75,000 cash advance at a factor rate of 1.2 (120%) would show the borrower has to pay back $90,000 over the course of each sale ($75,000 in principle + $15,000 in interest).
As trucking is highly cyclical, merchant cash advances can be very appealing to trucking companies and owner-operators just starting out. Because the lender is paid only when the borrower is paid. Plus, these payments are typically made automatically, eliminating the need to write checks each month, and avoid the stress of missing a payment.
Due to the uncertainty of when repayments are made, merchant cash advances have higher interest rates, 20% in our example with Joe Trucking. Some rates can run as high as 40%. Furthermore, merchant cash advances have the most stringent prepayment penalties equal to the entire interest due. Should Joe Trucking land an $80,000 job, they could not pay off and extinguish the loan, as the full $95,000 is due and payable at any point of the loan.
While merchant cash advances are tied to unearned and unrealized future revenue, invoice financing is directly tied to earned and unrealized current revenue. In other words, invoice financing is a commercial loan in which the borrower sells a percentage of its accounts receivables or total invoices unpaid or uncollected, at a discounted rate to the lender.
Invoice financing goes by many names including invoice factoring, invoice discounting, as well as invoice financing. Along the same lines, lenders that specialize in invoice financing are called factoring companies or trucking factoring companies.
Similar to a merchant cash advances, there are no strict monthly payments and capital can be available in as little as 1 to 4 business days. The owner-operator or trucking company assigns the right to collect payment to the factoring company and receives an initial lump sum payment. As customers pay off their invoices, the lender directly collects any applicable fees before forwarding the borrower the balance, if any.
For example, let’s say Davie Newman is a new owner-operator. He happens to have excellent marketing and sales skills and is able to land $85,000 in invoices with payment due 30 days after delivery. Davie, however, does not own a truck, and is unable to qualify for any other type of financing. He decides to sell the $85,000 in invoices for an upfront cash payment of $59,500, or 70% of the total invoices unpaid, as well as 10% of each dollar that comes in from customers. With the $59,500, Davie is able to purchase a used truck and complete the deliveries.
Interest rates tend to be the same as other financing options, ranging anywhere from 8 to 30 percent interest. Plus, for each week invoices go unpaid, lenders will charge trucking companies a fee as well.
However, the arrangement is not forever, as companies can sell off 90-day, 60-day, or even 30-day unpaid invoices, leaving the rest of their revenue untouched. There are even factoring companies that will offer small operators the ability to sell a single large invoice, called a spot factor.
Invoice financing can provide an excellent source of funding for entry level companies as the main concern of lenders is the creditworthiness of the customers, not the borrower. In this regards, asset-based financing can be a can provide excellent finding option for owner-operators and companies with poor business and personal credit.
Equipment Financing Loans
Equipment financing loans are loans designated for purchasing the equipment necessary for a business to function. The equipment can be anything from conveying technology, truck lifts, and warehousing machinery. In this guide we will focus on equipment financing used for the acquisition of commercial vehicles and semi-trucks.
Where we refer to commercial truck loans as well as semi-truck financing in the remainder of this guide, we are in large part talking about equipment financing for commercial trucking and transportation companies.
Commercial truck loans and semi-truck loans are sub-types of business loans available to companies, which can only be used to purchase commercial vehicles. At their core, commercial truck loans and semi-truck financing operate very similarly to traditional consumer car loans where the vehicle itself is the asset used for collateral. In the event a borrower defaults on their monthly payments, the lender retains full rights to repossess and sell or re-lease the truck to a different party.
The only major difference between commercial truck and consumer car loans is the actual approval process and setup. A commercial truck and semi-truck are only valuable when they are in use. Therefore, lenders will want to make sure that your business has a plan and system in place to use the vehicle to generate revenue to pay them back. Your business’ financial history, including your own personal credit and financial standing, become important considerations to secure an approval.
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Frequently Asked Commercial Truck and Semi Truck Loan Questions
What are the Commercial Truck Loan Rates?
Commercial truck financing interest rates range anywhere from 5 to 36 percent depending on your personal credit score your business credit score and the lender.
Borrowers with excellent credit are more likely to secure loans with favorable rates. While borrowers with lower and even ‘bad’ credit may have to pay interest rates towards the higher end of the spectrum.
Similar to any conventional business loan, owners that have been in operation for 2 to 3 years, have considerable cash reserves, and excellent credit (at least a 620 or higher FICO) are more likely to qualify for the best rates and no money down options.
Additional factors lenders also take into consideration are the experience of the driver or company, the current or expected mileage of the truck and the truck’s age.
What are Semi Truck Loan Rates?
Rates for semi-truck financing typically range from seven to 10 percent for borrowers with a fair credit profile. New operators with no assets and bad credit are highly unlikely to get any financing at all for a semi-truck, while established operators with proven profitability and additional collateral are more likely to be offered favorable loan rates.
What Do I Need to Qualify for a Commercial Vehicle Loan?
To qualify for commercial truck loans and semi-truck financing borrowers will usually have to provide extensive personal and business information, and in most cases is highly dependent on how long they have been in the business.
Startup & Early-Stage Companies
If you are getting started in commercial trucking, lenders will rely heavily on your personal financial information to determine your creditworthiness. They are likely to request the following items:
Applicable licensing permits
Commercials driver’s license (CDL)
Personal identification, such as a Social Security Number, to enable lenders to run a credit check
Proof of insurance, or demonstrated ability to get it in time for financing.
Personal tax and financial records
Information on the type of truck or commercial vehicle on which loan is being sought. Lenders will especially want to know the age, make, model, serial number, current mileage, condition, and who is selling it.
Established & Growing Companies
If your business is already established and you are seeking financing for the next one or two trucks, lenders will look more at the business operations and cash flow during their underwriting process. In these cases, lenders like to see the following items:
2 – 3 Years’ Business tax returns
2 – 3 Years’ Financial Statements (such as P&Ls)
Proof of Insurance & Incident Free Driving History
Number of years in business
Number of years with Commercial Driver’s License (CDL)
Keep in mind, these are general qualifications. Certain lenders may have stricter minimum qualifications, such as requiring proof of at least 5 years with your CDL, or a minimum of 2 years business history, or even a clean driving record. This makes it critical during your hunt for commercial truck or semi-truck financing, to ask lenders upfront what they will require to even consider your application.
How Long are Commercial and Semi Truck Loans?
Most commercial vehicles and trucks when in consistent use do not last long. As a result, loans on this equipment in most cases is no longer than 5 to 6 years. Terms for commercial truck loans are typically tied to a certain percentage of the useful life of the commercial vehicle.
For example, in a capital lease setup, if a semi-truck has a useful life of 4 years lenders may offer a loan for 75 percent of that time, or for three years. This is especially true with semi-truck financing. Because of the heavy conditions under which semi-trucks operate, most lenders will limit the loan to 5 years at the most, which is considered to be their entire useful life for accounting purposes.
There are a few exceptions. Traditional banks may offer longer term business trucking loans, which can be as long as 10 years, part of which can be used for the purchase of commercial trucks and vehicles. If an owner-operator or trucking company is seeking to finance a fleet, loan terms can be as short as 6 months or as long as 6 years.
How Do You Find the Best Commercial and Semi Truck Loans?
To find the best trucking business loan there are many variables to consider:
Loan Amount: It should go without saying that before you hunt for lenders, you need to determine the amount of funding you will need to either start your business or expand your commercial truck fleet. Lenders have different comfort levels, and while some may be willing to finance $500,000+ for commercial truck and business loans, the average loan amounts for others hover around $80,000.
Timing: Truly assess when you would need to have access to capital. If you are a startup and having cash on hand is the difference between getting paid or not, then consider financing options with fast approval and funding times. If you have an established business and are seeking access to funding to expand your operations, consider taking the time to gather your documentation and apply for the SBA programs, term loans, or secured business lines of credit. Also remember, while certain online lenders out there say they can provide instant funding, their loan amounts may be smaller and terms may not be as favorable.
Loan Costs: The age old saying there is no such thing as a free lunch holds true in the trucking industry. When it comes to commercial truck loans and business financing, expect to pay application fees, credit check fees, loan origination fees, loan document fees, and truck appraisal fees. These fees are a cost of doing business and how lenders make their money. That being said, don’t be afraid to ask lenders upfront what they charge so you can compare different options.
Minimum qualification requirements: Save yourself a lot of time and running around by gathering the paperwork you may need to qualify for a loan, ahead of time. This is important because if there are items missing, or items that you otherwise cannot get, you provide yourself ample time to acquire them. Likewise, if a lender requests items you don’t have, you can focus your attention on lenders that are willing and able to work with what you can provide.
Prepayment Penalties: A prepayment penalty is the fee a lender charges a borrower who pays off their loan before it’s due. It is an early termination fee, or penalty imposed on borrowers should they pay off their loan before it matures. When shopping for a commercial truck loan, be sure to pay attention to the minimum repayment period required and the fees if you end an equipment lease or purchase contract early.
What Commercial Trucks can be Financed?
There is generally no limit to the type of commercial truck or vehicle that can be financed. There are two main types of commercial trucks 1) a vocational or short haul truck, and 2) a long haul or semi-truck.
Examples of a vocational truck include:
Document Shredder Trucks
Vacuum Pump Trucks
Medium Duty Commercial Trucks
All Sizes & Types Of Trucks
PTO & Blowers
Buses and motor coaches for charter and tour service providers, transit contractors, schools, municipalities
Examples of long haul or semi-trucks include:
Heavy Duty Tractor & Trailers
Pneumatic Tankers (trailers that can empty their contents, like food and chemicals, with a pump or forced air)
Flatbed Trailers (cargo)
Dry Vans (common 18-wheelers seen on the road)
Lowboy Trailers (used to haul tall cargo, like construction equipment)
Can you Finance a Used Commercial Truck?
The actual condition of the equipment on which you are seeking financing depends on the preferences of the lender. Traditional banks and major lending institutions usually will not extend financing on used equipment as they pose a greater risk of needing repairs and maintenance. As vehicle downtime directly affects the ability for trucking companies to generate revenue, vehicles prone to greater periods out of business use affect a business’s ability to pay a lender back. If you are seeking equipment financing for the purchase of used commercial trucks or vehicles, alternative lenders may be a better option, especially with those with extensive experience lending to trucking companies.
Who Provides Commercial and Semi Truck Loans?
Truck loans and semi truck financing can be obtained from a variety of sources, such as traditional banks, alternative lenders, and SBA approved providers. Who you ultimately use as your lender will, in large part, depend on your personal credit and business history.
Larger trucking companies with an established business history looking to expand and grow will find major institutional banks as a good source of funding. These loans tend to require little to no down payment and have more favorable payment schedules and terms. However, banks will require near perfect personal and business credit scores, established cash flow and profitability, financial documentation dating back at least 3 years, and collateral in order to qualify.
For those with less than stellar credit there are an array of alternative lenders, such as Neal Business Funding, that provide financing for commercial trucking companies. You can also find subprime lenders that particularly specialize in working with borrowers with little to no credit history, poor credit, or even no documentation.
Lastly, manufacturers and dealers themselves can also be a source of commercial truck financing. As manufacturers and dealers have a vested interest in selling their vehicles, they are willing to offer finance programs with little to no fees, flexible terms, and cover a wide range of vehicles.
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