How Successful Owner-Operators Manage Start-up Cashflow

How Successful Owner-Operators Manage Start-up Cashflow

Understanding why many owner-operators fail in their first two years due to cashflow issues.

Before becoming an owner-operator, you were likely a company driver gathering the experience needed to, eventually, go on your own.

Over months or even years, you were probably constantly saving for the biggest investment of your career—purchasing or leasing a truck.

Hopefully, you have a mentor who is guiding you in the complicated world of going from a driver to managing every aspect of your new business. Your mentor can help you create short-term and long-term growth goals for your single truck company.

The choices you make from this point forward greatly impact your startup cashflow, growth timeline, and large future payment dates.

You might be asking yourself, …

Am I ready to go on my own?” or “Did I save enough to survive the owner-operator cashflow problems?”

Keep reading to find out if you followed the correct steps.

Purchasing a Truck affects Cashflow

Should you purchase or lease a new or used truck?

As your most expensive and most important asset, a used truck will likely cost around $60,000 or more while a new truck will cost around $100,000 or more.

To get a new truck, most dealerships require two years of driving experience, a clean driving record, 20% down payment, and a credit score of at least 650.

Many new owner-operators cannot afford to put 20% down and will often choose to lease the truck with around a $1,000 down payment.

In the short-term, leasing is always cheaper because leasing focuses on the value of the truck at the end of the lease term lowering the initial investment with an option to purchase or refinance for the remaining value of the truck after the lease ends.

For example, a $150,000 truck is leased-to-own for 4 years. After 4 years, the value of the truck is worth $50,000. So, during your lease, you are paying off the difference in value of $100,000 and then still owe $50,000 at the end.

Now, during the last 4 years, your business plan would be to save money to purchase the rest of the value of the vehicle at the end of the lease or refinance for the residual left on the truck.  

The average cost to lease a semi-truck is between $1,600 to $2,500 per month for new trucks and $800 to $1,600 per month for used trucks. Don’t forget that there is still likely around a $1,000 down payment if you’re leasing from a dealer.

Maintaining an Owner-Operator Business requires Cashflow Savings

Do you have enough money saved right now?

The biggest reason owner-operators fail is not having enough money saved up before going on their own to manage start-up costs, maintenance emergencies, or lagging payments after finishing a load.   

Truck drivers who are looking to go on their own must find a way to start a savings plan where you are regularly setting aside money, at least $200 per month. As you build your savings, you should learn how to build and use your credit score for when you later need to borrow for a truck purchase or repairs.

How much money do truckers need to save before becoming an owner-operator?

Starting your own business has a lot of expenses you should be prepared for, which includes:

  • Paying taxes
  • Start-up licensing and compliance costs
  • Vehicle payments
  • Vehicle maintenance
  • Daily operating expenses (food, fuel, etc.)
  • Commercial Truck Insurance
  • and more

On average, truck expenses alone for a new owner-operator is usually around $15,000-$20,000 per month for a single truck.

Before starting out, you should save up at least twice that to manage the first couple months of your new business. Ideally, many consultants recommend saving for at least 6 months of operation, which is closer to $100,000.

This advice stems from the biggest issue after starting your new trucking business, dealing with your load payment terms.

Cashflow is the amount of money coming in versus coming out of the company. The issue for owner-operators at the beginning is not having money come in for at least 30 days after completing their first few loads.

Delayed Payment for Loads can cause Cashflow Issues

On average it takes 35 to 45 days to receive payment after completing a load.

For example, if you haul your first load for $2,000 and bill the shipper or broker, you will not get paid for at least 30 days. Owner-operators need to have money on hand to pay for fuel, insurance, food, and more for the entire month before the money enters the bank account.

One way truckers mitigate these start-up expenses is factoring.

What is factoring?

Factoring is the selling of the invoice after you complete the load to the factoring company. Doing this allows you to get paid that same day, but with a cut for the factoring service. Carriers then use that cash to fund operating expense moving forward.

While factoring has its place for new or growing fleets, if you saved at least $20,000-$30,000 in your bank account, then you do not need to take a cut from your invoice for the cost of the factoring service.

To better understand the cashflow issues with growing fleets, stay tuned for the next article in this cashflow series.

Tips to consider when looking for Commercial Truck Insurance

TIP #1: Shop your insurance around

There are a lot of insurance companies out there and many different coverages to consider. We will shop you around to get you the best rate as some insurance carriers are weary of new CDL drivers due to the level of risk involved.

TIP #2: Consider operating radius limitations

When starting out, it is important to consider your operating radius and try keeping it smaller because insurance companies may limit your radius of operation.

TIP #3: Lower your credit score

It has been found that your personal credit score can have a direct correlation to the number of and possibility of claims in the future. Keeping your credit score low or attempting to lower it is always a good idea.

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If you have any questions or concerns, please call us at 800.724.5523 or email info@northernprotects.com.