Owner-operators in training

Laferrel Lewis, one year into his lease-purchase of his 2001 International 9400i from WTI Transport, plans to complete the deal in two more years.

Tim Cross owns his rig and drives under his own authority. He has a reserve fund for emergencies, sets aside cash each month for retirement and makes enough money to spoil family and friends at Christmas.

But Cross’ path to independence might be considered unorthodox to owner-operators who went into business after a long career as a company driver, building up credit and scraping money together for a down payment. Cross spent only one year as a company driver before entering Prime Inc.’s lease program and starting his career as an owner-operator. Seven years later, Cross says entering the program taught him key small business skills, improved his credit score and molded him into a successful owner-operator.

“I knew that was the best way to make better money,” Cross says. “Prime was a big help in getting me there. They offer you so much education.”

Cross exemplifies what carriers say is a growing trend among fleet lease and lease-purchase programs: As the programs have matured, fleets are using them more to grow owner-operators and less to make money off selling trucks or to dispose of dilapidated equipment.

“This used to be a way for fleets to get rid of used trucks,” says John Hancock, Prime’s vice president for recruitment and retention. Instead, carriers say they see the programs as tools to recruit and retain personnel, encouraging company drivers to become leased owners. In the process, fleets are creating a class of successful small business owners.

Drivers who successfully complete lease-purchase programs own a truck, have improved credit scores and gain business skills. For those who opt out of the programs or return their trucks, the downside is minimal. They may lose money in escrow or have to pay cleaning fees, but most drivers leave with the blessing of their employer, and few carriers report the purchase failure to credit bureaus.

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While most carriers are careful to offer reputable programs, some have aspects that don’t conform with the truth-in-leasing provision of federal law, according to the Owner-Operator Independent Drivers Association, which has filed seven lawsuits over such programs. Most of the cases are still in the courts.

Improper carrier practices range from holding on to escrow accounts after a lease termination to simply not giving truckers enough miles toward the end of their lease to allow them to pay their note, says Kip Hough, an assistant manager of compliance, rules and regulations for OOIDA, which now has its own equipment financing program. More egregious cases involve carriers that have signed up truckers only to sell the truck note to a third party, thus leaving a driver who has completed a program in ownership limbo.

Nevertheless, most major fleets and many smaller ones offer through lease programs an opportunity for company drivers to become owner-operators without the usual barriers of entry.

Carriers offer two basic programs: straight rental leases and lease-purchase. In both cases, the driver becomes an independent contractor because he controls the equipment.

In typical rental leases, a participant pays a weekly lease and at the end of the term – usually three years – begins a new lease with a new truck. Many have an option to buy the truck, but because the trucker hasn’t built equity in the equipment, the purchase price usually is near fair-market value. Prime and C.R. England have leases similar to this.

Salt Lake City trucker Dirk Vanderspek, who soon will finish a lease on a C.R. England truck, says he likes leasing even though he made more money as a company driver. “I made $90,000 one year being a company trainer,” Vanderspek says. “But with leasing I stayed under $60,000. I just wanted to own my truck for once.”

Under Vanderspek’s lease he pays for all expenses and out-of-warranty repairs, just as an owner-operator buying a truck from a dealer or bank would. But his carrier siphons off a portion of his settlements to accounts for repairs and maintenance – a fixture in almost all lease and lease-purchase programs.

Similar diversions worry groups such as OOIDA and some veteran owner-operators because that money cannot be used for other business or personal expenses. “The control is all in the carrier’s hands,” says OOIDA’s Kip Hough. “What gets fixed, what doesn’t get fixed, is up to them.”

But program managers say escrow funds keep their drivers in business and make saving habitual. “I can enable him to be successful,” says Prime’s Hancock. “I have the most vested interest possible to see him succeed.”

Lease-purchase programs operate similarly, except that drivers are building equity; often carriers will sell the truck for less than 10 percent of its fair-market value, or even as low as $1. Such programs often are treated just like straight finance plans, with the driver receiving the title.

Montgomery, Ala., owner-operator Laferrel Lewis is buying such a truck from WTI Transport. Lewis wasn’t sure he wanted to be an owner-operator after five years as a company driver, but took the plunge last year.

“I’ve grossed over $100,000 since I started the program in March,” says Lewis, who doesn’t see a lot of difference in owning versus being a company driver. “I drive the same routes. I have the same dispatcher. I still have my weekends off.”

Lewis plans to earn the title to his 2001 International 9400i after two more years of leasing. If he succeeds, he will have beaten the odds, says Perry Wiseman, owner of Truckers Accounting Service in Omaha, Neb. “Truckers don’t typically complete lease-purchase programs,” Wiseman says. About 30 percent of his clients are in such programs. “The payments are usually too high for them.”

There are no hard figures on failure rates. Many drivers who enter the programs will fail, though carriers say it’s not the programs’ fault. “A lot of these drivers who get into lease-purchase programs have bad credit and no idea about business management,” Wiseman says. “They’re doomed to begin with.”

Company drivers who experience financial hardships at home or see a decrease in miles don’t have to fret over truck payments. But independent contractors – including those in lease and lease-purchase programs – have to make their payments, no matter their problems, and that can be frustrating.

“I don’t have any real influence,” Dirk Vanderspek says of the miles he gets. “I have to trust my dispatcher.”

To compensate, some carriers favor lease-purchase drivers on dispatch boards. Others work with drivers to build up reserves for inevitable slowdowns. “With our lease there are no fixed expenses – truck payment, insurances, etc. – for the first two weeks,” says Oscar Kleman, supervisor of recruiting for Anderson Truck Service. “We want the driver to run hard, build up some cash reserves and be successful.”

Beyond miles, drivers experience other problems with the management of the lease. Trucker Chris Guilbault of Greenwich, Ohio, says he’s a company driver again after leaving the lease-purchase program at a large carrier. “I had maintenance issues. The whole program itself wasn’t bad. But they told me they were going to do my warranty work. Once they got you in a truck, that didn’t happen.”

Guilbault’s truck was used – as many are in lease-purchase programs – and had a broken sunroof and a cracked fairing when he got it. “They weren’t major and they weren’t DOT problems, but it was stuff they said they’d fix. It never materialized.”

Guilbaut left his program without repercussions, but some carriers will report the default to credit bureaus, says OOIDA’s Hough.

Carriers benefit when drivers complete the programs, so most work to ensure drivers’ success. WTI Transport, for example, pays for owner-operator services from American Truck Business Services. This helps drivers manage their money and plan for their business, says WTI’s Steve Yarber.

“They just can’t jump into a truck and go,” he says. “We counsel our drivers. And our success rate is pretty good.”

At Anderson Truck Service, says Kleman, “If the driver has a solid business plan, reasonable personal expenses and takes advice on managing the truck expenses, our success is about 70 percent.”

That was John Cross’ experience when he was in Prime’s lease program. The drivers who failed were ones that didn’t want to drive or took advances and got into debt. Cross says a willing driver can gain his independence through a leasing program.

“I didn’t have the credit when I leased with Prime. You don’t need credit to do that,” says Cross. “I made better money and I worked on my credit. Finally, it all came together last year. I had a very good year, my credit was decent enough and I found a banker interested in helping me.”


TAX CONSEQUENCES
With income taxes, straight leases are handled differently from lease-purchase programs, which depreciate equipment just like a traditional bank loan. The difference is in the payoff price, according to trucking accountant Perry Wiseman.

If you buy a truck at the end of a lease for less than 10 percent of the fair-market value, you can depreciate the rig during the lease just as you would with a bank- or dealer-financed purchase.

When the purchase price is above 10 percent or the truck will stay with the lessor, then you can deduct your rental payments.


EVALUATING PROGRAMS
Thoroughly check out any lease or lease-purchase program and do the math before you sign up, experts say. Don’t focus solely on the monthly payment, but the total cost of the program. Estimate what you will have to make to cover your fixed and variable expenses, as well as personal costs.

“You need to understand the deal,” cautions Prime’s John Hancock. “Is it an equity purchase or a rental agreement? What does the full burden cost each month? A carrier might say their lease is only $300 a week, but we know you can’t operate a truck on just that.”

Visit the company you’re considering and ask drivers and the carrier questions about the program, such as:

  • What is the term of the lease?
  • What is covered under warranty and who fulfills the work?
  • What happens to excess maintenance funds?
  • Is there a down payment?
  • Are there other costs for Qualcomm rental, etc.?
  • Is there an early exit option?
  • Can you leave your carrier and take the truck elsewhere?
  • What kind of tractor is available? Age, specs?
  • Is there a down payment?
  • How soon do payments begin?
  • What is the total cost to complete the program?

Calculate your cost per mile under the program and make sure you will get enough miles not only to cover the cost but earn a living. From these numbers, develop a business plan, just as an owner-operator looking for financing would do.

“Become disciplined and set money aside,” says Oscar Kleman of Anderson Truck Service. “You can expect some very high and very low weeks.”

If the program doesn’t provide an accounting service, find one.