Getting your own authority means greater risk–and possibly greater awards. Do you have what it takes to go it on your own?
Ah, the joys of independence. No dispatcher bugging you to take a load you don’t want. No carrier skimming a percentage off the top. Just you, the freight you want to haul and the open road. What could be finer?
Not so fast. Sure, going independent can help you earn more and be more in control of your own destiny. Owner-operators with their own authority typically make $6,000 more each year than their leased counterparts. But with greater reward comes increased risk. You’ll have to find your own freight. There are no convenient cash advances. It’s unlikely you can negotiate a fuel surcharge, or at least one as good as a large fleet would share with you. And getting customers to pay promptly can be downright frustrating.
“In the last six years I’ve had 30 of my clients attempt this and none of them has succeeded,” says owner-operator accountant and business consultant Kevin Rutherford of The Alliance. “Every one of them is either out of business or back leased to a carrier.”
But with the right planning and preparation, you can be successful. “I’m making more money than I’ve ever made in my life,” says Chris Lewis, a Jackson, Mo., independent who pulls a flatbed. “I’m currently hauling landscaping material in Maryland for $3 per mile. This is the best I’ve seen it in nine years of doing it on my own.” Lewis attributes the current strong business climate to the rash of high fuel prices in recent years that forced some weaker operators out of business. “It’s better for those who survived,” he says.
Some industry experts say the strong economy makes this the best time in a long while to go it on your own. Bob Costello, chief economist of the American Trucking Associations, predicts manufacturing productivity will grow as much as 5.5 percent this year and up to 6 percent next year – meaning freight should remain strong. Already in the first quarter of 2004, truck tonnage was 7 percent higher than a year ago.
“It’s the American dream that a guy can own a truck and be a smart operator,” says Hank Seaton, a transportation lawyer based in Vienna, Va. “If there was a time that’s right for people to get back into it, it’s now.”
Are you ready to declare your independence? Answering these 10 questions should help you determine if you should join the ranks of our nation’s 50,000 independent owner-operators or if remaining leased is the best choice for you.
1. DO YOU HAVE A PLAN? Take the time to map out how you will succeed as an independent. You don’t need to be a Harvard graduate to put together a basic plan that includes a list of your customers or potential customers, revenue and cost projections, and area of operation. For more details, see “How to Write a Business Plan” in Overdrive’s June issue, also available in the eTrucker.com archives.
2. HOW MUCH MONEY HAVE YOU SAVED? When it comes to getting their own authority, “the biggest problem lots of guys have is that they are under-funded,” says Mark Portolano, owner of Sandpiper Xpress, Largo, Fla., who has had his own authority for five years. Because he started without sufficient cash on hand, Portolano, who hauls produce, has only recently reached a point where his business is taking care of itself without “having to dig into personal finances,” he says.
The biggest issue is cash flow. Leased owner-operators who are used to receiving settlement checks every week or 15 days, not to mention cash advances, may find it tough to pay their bills if customers wait 45 days to pay for loads. “The hardest part for us early on was we didn’t have any money saved,” says Heather Hogeland, who runs Southern Star Transport with her husband, Roger. “We had to find people who would pay us right away or give advances,” says the Bloomington, Calif., independent. Some brokers do offer “quick pay” or advances, but they typically charge 2 percent to 5 percent for this service, Hogeland says.
Hogeland recommends truckers have about $10,000 in the bank or enough capital to operate for 30 days before going out on their own. Such a cushion will help get you through late payments and potential problems, such as a breakdown or illness.
3. WHO WILL BE YOUR CUSTOMERS? “Anyone who wants to start off in the business should have a guarantee or know where there’s some good-paying freight in one direction,” says Seaton. Successful independents recommend contacting potential customers and brokers – before you leave your carrier. New independents who don’t have any steady business lined up “can get in trouble real quick,” says Lewis, who has a freight contract out of his home area. “That’s where I make my good money,” he says.
When it comes to what type of freight you haul, experts recommend staying away from the 48-state dry van business that’s the domain of the big carriers. “My advice would be to look for the fringes – the niche markets,” Rutherford says.
Unless you plan to haul produce, where most freight is brokered, it’s not a good idea to exclusively haul brokered freight, experts say. “As a rule of thumb, we say if you’re not getting 50 percent of your freight direct from a shipper without a broker in between, you might as well stay leased to a carrier because you’re not going to survive,” Rutherford says.
The Hogelands, who haul produce, take a lot of brokered freight, but they also haul direct for a produce company. Hauling direct saves them $500 per load, but they have to wait 30 days to be paid. Hogeland cautions, however, that such business can be tough to find. If you’re a small carrier, “direct customers are hard because they don’t want to mess with you,” she says.
And while online load boards can be a good way to get spot loads, don’t rely on them as your main freight source, experts say. “If [owner-operators] are going to go to all the trouble to get the authority, then have to go to load boards to get loads, you wonder if they aren’t still working for the man under a different name,” Seaton says.
Go about building a customer base the right way and it will pay off, Lewis says. After nine years of independence, “I’ve literally got people calling me. It’s making it easy.”
4. HOW SHOULD YOU STRUCTURE YOUR BUSINESS? When you file for your own authority, you will be asked to state your form of business: corporation, sole proprietorship or partnership. Going independent does not have to change business status, “but they should consider if they should be incorporated,” Rutherford says, something he typically doesn’t recommend for single-truck leased owner-operators.
Under partnerships and sole proprietorships, the owner and the business are the same entity. Corporations, however, are treated separately from their owners, and consequently are more sophisticated to operate, says Howard Abrams, president of PBS Tax & Bookeeping Service, Tarzana, Calif. Corporations must file separate tax returns and payroll, must maintain a general ledger, and must keep a business checking account.
One reason to incorporate is to try and protect your personal assets from those of the business. “Once you go out on your own authority, whether or not we can really create liability protection is up in the air,” Rutherford says. “But without a carrier to shield you, we might want to consider it a little bit harder,” he says. Check with your accountant or legal adviser to determine your best business status.
5. HOW WILL YOU FILE FOR YOUR AUTHORITY? If you have the time and the inclination, you can do the paperwork for getting your own authority yourself. If all goes well, $300 and 30 to 45 days later, you’ll be an independent. Simply call the Federal Highway Administration at (800) 832-5660 and have an application mailed or faxed. Or, you can complete the process online – including payment – at www.diy.dot.gov. (Click on FMCSA, then “registration applications,” then “motor property carrier/broker authority.”)
Independent Mike Portolano chose this route, which he says required “phone calls, phone calls and more phone calls,” as well as lots of Internet research to learn about insurance, compliance and other fine points. Beyond just the time investment, mistakes made through inexperience can hold up – or disqualify – your application. In that case, you lose your $300 filing fee and must start all over again.
That’s why many owner-operators use a filing service, which can guide you through the process from start to finish. “I have guys who start their authority and get in the middle of it and say ‘now what am I supposed to do?'” says Carol Pense of The Permit Connection in Alma, Ark. Services such as Pense’s offer the peace of mind of working with someone who knows the ins and outs and who has the time to monitor the status of your application. For around $650 (which includes the $300 filing fee), such services not only file for authority, but may also follow up with the insurance companies, help compile driver qualification files and provide process agents. (Process agents can serve legal papers. You are required to have one in every state so that if a state needs to serve you with legal papers, it knows where to deliver them.)
6 ARE YOU PREPARED TO DEAL WITH BROKERS? As an independent operator, you’ll no doubt be dealing with brokers. Their experience with negotiating pricing and terms puts inexperienced owner-operators at a real disadvantage. “A guy who’s brand new with his own authority has no experience with negotiating anything,” Rutherford says. He recommends reading everything available on negotiating and even taking a seminar to hone your bargaining skills.
Before hauling a load for any broker, do a thorough background check on it. Services such as the Red Book Transportation Brokers Rating Service and the Gold Book of Transportation Brokers let you compare brokers using a variety of factors, including how quickly they pay. Both are available online and in printed format. Cost ranges from $150-$300 per year. This may seem like an unnecessary expense, but “one broker can literally put you out of business in a very short period,” Rutherford says. A common scenario is for a broker to feed you great loads that promise a good rate. But after two or three weeks, “the check’s always in the mail,” he says. “Pretty soon, in a month you’ve moved $20,000 worth of freight for them and they don’t pay you.” At that point your only recourse is to take the broker to court, something most owner-operators can ill afford.
Portolano recommends doing business with larger brokerage houses, such as CH Robinson, which he has been using for four years. “I got tired of being a credit company myself,” he says. “If I can’t get paid in under 15 days, it’s not worth my time.”
7. HOW MUCH INSURANCE DO YOU NEED? The cost of insurance for independents has more than doubled in the last three years, Rutherford says. “It’s tough to get someone to even write the policy anymore,” he says. If you previously got your insurance through the carrier you were leased to, you got the same rate whether you had one ticket or three tickets because the carrier negotiated it based on their entire safety record, not each individual driver. But as an independent, everything on your record affects your rate and can make it tough to get insurance at all.
Experience also counts. “Most insurance companies do not want to look at somebody until they have three years’ experience, so you will pay a higher premium if you’ve been in business less than three years,” says Tim Valdez, vice president of Transportation Specialists Insurance Agency. Companies will also require a 25 percent down payment. “On $5,000, that’s $1,250 up front,” he says.
You’ll need liability insurance and cargo insurance that you didn’t need as a leased operator because you were covered under your carrier. The cost of liability insurance, which protects you from third-party injuries, varies depending on where you haul and the type of freight you haul. But the standard $1 million coverage ranges from about $5,000 to $6,000 per year. Cargo insurance varies, based on your freight, but generally runs around $1,000 annually. You may also want to consider commercial general liability insurance, which covers your acts as a business owner, such as if you injure someone on a loading dock. It runs about $600 to $700 per year for a single truck.
There are other types of insurance that you may have had as a leased operator, but which can be even more important as an independent, says Eric Byers, assistant vice president of product development for Transportation Specialists Insurance Agency. For between $1,560 and $1,980 per year, occupational accident insurance, for example, covers you in case of accidental death and dismemberment or accidental injury on the job. Business expense insurance will pay up to $500 weekly for your truck payment after 30 days of being sidelined due to an accident on the job. It runs between $420 and $600 annually.
When selecting insurance carriers, “it may seem convenient to buy everything through one company, but it may not always be the most economical solution,” says Ed Campbell, president of First Guard Corp., Venice, Fla. He recommends getting one quote for liability, a separate quote from a different carrier for cargo insurance and yet another quote for physical damage.
8. HOW WILL YOU HANDLE COMPLIANCE? “Just because you’re an independent doesn’t mean you’re exempt” from the Federal Motor Carrier Safety Administration regulations, Hogeland says. Even though your operation may be no larger than you, or you and your spouse, you’ll need to maintain driver qualification files, set up a drug testing program, and perform regular log book audits, vehicle inspections and maintenance reports.
Compliance comes easy for Hogeland, who at one time worked as a safety director. “I read that little green book (FMCSA rules) from cover to cover,” she says. “I’ve never been wrong on it since I’ve studied it.”
Lacking such experience, you may be confused about compliance details like how long to keep log books. And the smaller your fleet is, the more critical compliance becomes. Because DOT looks at accidents per 100,000 miles, one accident can put you over the national average. For that reason, “small carriers have a hard time staying off DOT’s radar screen,” Seaton says.
Under a rule that went into effect last year, new carriers must contact the DOT within 90 days of starting their business to set up an initial audit. During that review, you’ll need to show that you’ve joined a drug consortium for random drug testing. You’ll need to provide driver qualification files that include a medical examiner’s certificate, road test certificate and inquiries to previous employers – essentially a personnel file on you or anyone who drives for you. And you’ll have to show maintenance reports.
“The first time they come out, it’s more educational,” Pense of The Permit Connection says. “They may want to come back at another time to make sure you’ve done it right.”
9. WHO WILL HANDLE YOUR TAXES? Once you have your own authority, “more money is usually flowing through the company, so there’s more tax planning and tax projections involved,” Abrams says.
There’s also more tax-related paperwork, especially when it comes to fuel taxes. “That’s the one that seems to catch everyone by surprise,” Rutherford says. Carriers typically do the fuel tax reporting for most leased owner-operators, so while you’ve been paying the taxes, you may not have dealt with them directly. You’ll need to develop a system for tracking the miles you run in each state and for filing International Fuel Tax Agreement reports. If you have only one truck and are on the road all of the time, you may want to hire a service for around $30 to $50 per month to file your IFTA reports. Software programs that compute the taxes for you are another option.
10. HOW WILL YOU TRACK COSTS? Once you go independent, tracking your operating costs becomes even more critical because it’s the only way to ensure you price your services to get the profit you need.
“I’m anal about keeping records,” Lewis says. “I don’t know how a person can operate without keeping track of every little thing. I stay abreast of exactly where I’m at at any given time.” On weekends, Lewis enters all his data into his computer so that he can always pull a current profit and loss statement. “I can use that to go to a bank and get financing,” he says. Lewis has the advantage of having learned business skills while managing his grandfather’s sawmill and pallet operation. If you don’t feel you have the experience necessary to keep good records, make sure you find an accountant who will work closely with you throughout the year, not just at tax time.
Many owner-operators dream of the day they’ll strike out on their own. Given the added costs and greater risk, going independent is not for the faint of heart. But if the challenges sound more exciting than scary, getting your own authority could be as right for you as it is for those who wouldn’t operate any other way. “It breeds problems,” Portolano says. “But, I kind of live for that.”
NAME YOUR AUTHORITY
When you file for operating authority, the Federal Motor Carrier Safety Administration requires you to choose one of three basic forms:
CONTRACT CARRIER – Provides for-hire transportation to specific shippers, based on a contract. Contract carriers must file only liability insurance with the FMCSA before it will issue the authority. Contract carriers can negotiate a new rate on every load. This is the type of authority most owner-operators will want.
COMMON CARRIER – Provides for-hire transportation to the general public. A common carrier must file both liability and cargo insurance with FMCSA. Common carriers must publish rates and adhere to them. This type of authority provides a tax benefit in some states; check with your accountant.
BROKER’S AUTHORITY – A company that arranges for the transportation of cargo belonging to others, using for-hire carriers. Brokers must file either a surety bond or trust fund agreement.