Anyone who owns a trucking business or is thinking of buying one has to face the reality that trucking equipment doesn’t come cheap – and it’s only going to get more costly. Buying a trucking company for sale or expanding an existing business requires an infusion of capital. However, finding financing isn’t as simple as getting your typical mortgage or business loan.
Because the majority of lenders don’t understand value in the freight brokerage industry, they view all truck business owners as high-risk borrowers. As a result, many demand a large amount of collateral. When a truck isn’t enough, some business owners offer up the biggest asset they have: their house. The New York Times reports that the percentage of small business owners who tapped into home equity for their business climbed to 27.5 percent from 18.4 percent between 2001 and 2006. As you might imagine, recent real estate values have made this a risky proposition on the borrower’s part.
But funding your business plans may not require betting the house. When it comes to investing in a truck company, there are several alternatives to traditional financing.
Banks tend to be extremely conservative with the valuation process for a trucking company, even if the investor has good credit and experience. For entrepreneurs with a solid business plan, peer-to-peer lending may offer an alternative avenue. Companies like Prosper.com allow investors to structure loans between family and friends or post loan requests, which can be filled by any number of private lenders. Peer loans are usually for $25,000 or less, so investors in need of more capital might still need to combine them with other financing sources. On the plus side, borrowing from peers can mean fixed monthly payments and no major collateral. Additionally, private lenders are more likely to evaluate risk based on the individual situation rather than on a stereotype of an entire industry.
It’s estimated that 75 percent of sales of small- to medium-sized businesses now involve some amount of seller financing, according to Global Exchange. In seller financing, the buyer asks the seller to finance a portion of the sale by carrying a note. This type of arrangement often benefits both parties. Since traditional financing is avoided, a buyer can comfortably offer a higher purchase price. Because the business itself can serve as collateral, the buyer may be able to protect personal assets. Generally, owners of a trucking business for sale will finance a larger percentage of the sale if a buyer has considerable experience in the trucking industry, and if the business is in a position to experience growth.
For entrepreneurs who can qualify, traditional loans still offer the largest amount of capital. The key to keeping terms manageable is finding lenders who understand the trucking business. Specialty finance companies focus on lending to a particular industry, such as transportation or, more specifically, trucking companies. With some research, it’s also possible to identify individuals within traditional banks or the Small Business Administration with a history of dealing with transportation businesses. These specialists not only see the risk associated with the truck business, but also the potential for reward. As such, they may be more likely to give weight to an investor’s previous experience or fairly assess the risk of an investor entering the market for the first time.
In any case, chances of receiving affordable financing are always best when investors come to the table with an organized plan and an accurate trucking company valuation.