Dollars & Sense

Kevin Rutherford | May 01, 2012

Ownership risks and rewards

There is more than one way to be a business owner in trucking. As the degree of independent increases, so do the potential risks and rewards.

LEASE-PURCHASE OPERATOR. This means you have signed a lease or a lease/purchase agreement to get your truck through a carrier or a third-party leasing company.

PROS. This is the easiest way to get into business. It requires little or no down payment, credit rating or business experience. You might be able to find a simple, walk-away lease that will let you test the waters without a lot of risk.

CONS. Because there are so few requirements, many people sign the deal long before they’re truly ready, saddled with equipment that’s too expensive and lacking the financial skills to manage maintenance costs. They end up losing a lot of money.

Many lease-purchase deals restrict your decision-making ability when it comes to equipment, such as the freedom to add wide single tires or an oil bypass filtration system. Your two largest costs – fuel and maintenance – can be lowered by such modifications.

Another problem with many lease-purchases is that you are leasing from the same entity that also controls 100 percent of your income. Most contracts prohibit or make it very difficult for you to take the equipment elsewhere. This puts you at risk if things go wrong with the carrier.

Almost anything can be written into the agreement. You need somebody on your side who can interpret what that legalese means.

LEASED OWNER-OPERATOR. This means you buy your equipment – outright or with a loan – and lease it to a carrier. You run under the operating authority of the carrier.

PROS. You have unlimited selection of equipment as a leased operator instead of the small selection of a lease-purchase deal. You also have almost total control over the modification and maintenance of the equipment. You can decide who you will lease to.

Adding trucks to your operation is a sure way to generate more income, but your success still depends on how well you manage the fleet.

CONS. Unlike many lease-purchases, there are no walk-away options. Once you sign to buy, you are committed. If you borrow for the equipment, you are committed for the entire loan plus interest, with severe financial consequences if you default. Believe it or not, you would even owe income tax on the money you failed to pay back.

CARRIER. If you get your own operating authority, you become a motor carrier, even if you own only one truck.

PROS. The biggest advantage for some owners is a higher profit margin. There is no carrier taking a piece of the action before you get your cut.

There is almost complete freedom on how you run the business. You decide what equipment to buy, what freight to haul, and when to work.

CONS. That freedom also brings more work and complexity. No longer do you call dispatch for your next load. Do you want to develop your own customers, soliciting freight directly from the shippers? Or do you want to work through load boards or brokers? The latter is easier, but also means giving some revenue to the broker.

In addition to finding and developing customers, you will be responsible for invoicing, collections, compliance, safety, drug testing, hours of service, licensing, permitting, fuel tax and mileage tax. And the list goes on.

Possibly the biggest reason for failure is cash flow. Many owner-operators are used to being leased to a carrier that pays every seven days and will advance money. But when you are dealing directly with shippers and brokers, you may wait 30, 60, 90 or even 120 days to get paid. Sometimes you may not get paid at all.

SMALL FLEET. You can build a small fleet while being leased to a carrier or you can do it with your own operating authority.

PROS. The biggest draw is that more trucks can generate more revenue. Managing a successful fleet can enable you to spend less time on the road, or even none at all if the fleet grows enough.

CONS. By far the biggest risk and responsibility is adding employees. You will be competing with thousands of fleets. Recruiting and hiring drivers consumes a lot of time and money. Cut too many corners and bad drivers will break your business.

Growing a business is a lifetime venture. It’s challenging and potentially rewarding. The beauty is that the choices are all yours.

Kevin Rutherford is an accountant, small-fleet owner and the host of “Trucking Business & Beyond,” which airs on Sirius XM Radio’s Road Dog Trucking Radio. Contact Rutherford through his website, LetsTruck.com.