When debt makes you cry ‘uncle’

By Max Heine
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One of your biggest challenges is keeping debt to a manageable level. But what is that level? No magic measurement fits every operation, but data in the 2007 Overdrive Owner-Operator Market Behavior Report provide some helpful guidelines.

The average business debt is $26,600 for single-unit operators, $66,800 for multi-unit operators, most of those with two or three trucks. That’s good information to start with, but you can better judge your debt level by measuring it as a percentage of revenue.

That’s one of two key debt-related ratios lenders look at, though they also include personal debt, says Dan Prime, general manager of ATBS, the Denver-based owner-operator financial services company. It’s to your advantage at borrowing time to have that ratio as low as possible. The other ratio lenders examine is monthly debt payments versus monthly cash flow, he says.

As the center chart shows, more than three-fourths of operators have a business debt-to-revenue ratio of 40 percent or less. That’s generally a safe area, especially if you have a fairly young truck loan. But if you’ve paid off your 15-year-old truck, and business credit card debt still is demanding 40 percent of your revenue, that’s a nasty habit to feed. You could be facing a tough time when you trade that low-value truck for a high-dollar loan.

A closer examination of the data shows a big chunk – one in six of all respondents – have a ratio of 50 percent or more. Some of those with a large, brand-new loan for a truck might be OK since their ratio should drop steadily every year as they pay off the loan, but even at 50 percent, they’re still cutting it close. The rest of those dog-paddling in red ink should check with their financial adviser to cut costs or increase revenue, if not both, to reduce debt.

The problem with a high debt-to-revenue ratio is “it gives you less financial cushion to meet unexpected events,” such as the cost of a major repair or unexpected downtime, says Chris Brady, head of Commercial Vehicle Motor Consulting, which conducts the Market Behavior Report.

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Worst “is when their current cash flow can’t meet their expenses and they substitute debt, primarily credit card debt, to meet expenses,” Brady says. “Ultimately you can’t continue to do that, or your debt will overwhelm you. You’ve got to improve your cash management.”

Most owner-operators’ biggest debt is their truck. The good news there is that truck loans, like business loans from a bank, usually have much lower rates than credit cards.

Loans for trucks and other secured loans, such as cars or houses, are lowest because assets are backing them up, says Dan Prime of owner-operator financial services company ATBS.

A bank’s business loan often is around 1 percent a month or 12 percent annually, he says, and most truck loans fall between 10 percent and 20 percent.

Credit card rates usually are highest. Depending on state laws, they can exceed 24 percent.

With all loans, a higher credit rating gives you a lower interest rate.

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