Partners in Business: Going independent

dsc_0079Two upsides to getting your own carrier authority are the potential to make more money than a leased operator and the almost complete freedom associated with how you run the business. This sounds wonderful, but with freedom comes risk and responsibility.

Many owner-operators decline to pursue getting their authority because they realize they are unprepared for that level of responsibility. Or in some cases, industry conditions are not favorable. While many things have changed over the past five years, preparation still is far more important than shifts in the economy.

The preparation starts with deciding where you’ll get your freight, since that no longer will be a matter of calling dispatch. You’ll have to locate your own customers or work through load boards and brokers.

FINDING YOUR OWN CUSTOMERS. Soliciting freight from shippers can be a daunting task for an individual, but it results in the highest freight rate. There is no middleman to take a cut. There are several ways to find small, local shippers. You can use business directories online or attend local business functions, such as chamber of commerce events. One easy way is to drive around industrial parks and take notes.

List 25 to 50 potential customers, then schedule two weeks off the road to contact the shipping managers unless you have a spouse or other partner who can handle this. Be ready to hear no many times. If you generate just one customer, consider it a success.

As a one-man show, you may find this task awfully time-consuming and difficult. If you’ve never worked in sales, prepare yourself. There are hundreds of great audiobooks on sales and negotiation. Listen to some while working on your plan.

In any bid to secure a contract with a shipper, make sure you can answer this question: Why you? Why should any particular shipper entrust its freight to you? Setting yourself apart from the crowd, however you do it, will help you find customers starting out that can last throughout your career. Some ways to build a customer base include having special equipment, running a part of the country that many others don’t like to go, or finding your way into a niche market such as hauling cattle or cars. Having a specialized trailer that makes you unique in your area can set you apart from other carriers.

GET HELP. If personal solicitation sounds too overwhelming, consider other options:

•Hire a freight broker to work as your direct sales agent.

•Find a business partner with experience in freight sales. If you choose to follow this path, you’ll also need your broker authority in order to move enough freight to support both partners.

If you decide not to acquire your own customers, you’ll need a plan for working with brokers or using load boards. Don’t make the mistake of looking randomly for freight every time you need to load. In the beginning, focus on good back-and-forth lanes or areas with one point being your home – or use a triangular strategy to find the best rates. Consider fuel prices in all of those lanes, weather, traffic, road conditions and, of course, freight rates and availability.

Research load boards daily to see what is available in your preferred areas. You’ll get an idea of types of freight, average rates and which brokers have the freight.

Once satisfied with an area or lanes, contact brokers that control freight there and explain what you have to offer. Your goal is to create a strong working relationship and provide outstanding customer service.

All of this can be done while you’re still a leased operator. Devote at least two months to this part of the plan.

Once your business model is established, you’ll be ready to jump through the administrative and regulatory hoops for going independent.

The hurdles of cash, fees and paperwork

The financial and technical preparations for going independent are not easy. Consider using companies that will complete the authority process for you.

Cash flow. It’s not unusual for a carrier to wait 30, 60 or even 90 days to get paid. Sometimes you never get paid. An initial cash flow lull can make it extremely difficult to launch your business.

Cash and credit: Your ultimate goal should be to have enough cash in reserve to operate without borrowing. This may take months to accrue. If you don’t have that kind of money, consider a revolving line of credit with your bank. You also can use a home equity line of credit, but understand that if you’ve borrowed too much and your business goes belly-up, you could lose your home.

Broker quick-pay: If you plan to use brokers, ask about a fast-pay option that, for a fee, guarantees your money in a certain number of days.

Factoring loads: Having a third party collect your receivables for a fee can be confusing and costly. Learn about the costs and risks involved with different forms of factoring. (See Chapter 11.)

Getting insurance. A carrier must have liability and cargo insurance. A $1 million liability policy and a $100,000 cargo policy is recommended. Obtain insurance within the first two weeks of the DOT number being filed to avoid delays in authority processing or having it dismissed. Check with an insurance agent before applying to make sure you are insurable, or else you risk wasting your effort and fees.

How to file for your authority

After establishing your business entity (see Chapter 13 for more about the choices of business type), following these filing steps to obtain your authority. Federal filing information and forms are available via FMCSA.DOT.gov.

Get USDOT number. Traditionally, there has been no fee to register for your U.S. Department of Transportation number. As of January 2017, when MC numbers (see next item) are phased out as part of FMCSA’s new Unified Registration System, the $300 filing fee previously associated with MC numbers will transfer to the DOT number. For this filing, the FMCSA’s online system will guide you through the process. For those filing paper, use the MCS-150 form.

Get MC number. Apply for authority and motor carrier number, and pay the associated $300 fee. In FMCSA’s online application system, checking yes to “filing as for-hire” will take you to the OP-1 form. FMCSA will issue you a lead docket number that will ultimately turn into your MC number. After payment and FMCSA review, you’ll receive a letter with a phone number to call for confirmation. (This step will be integral to obtaining the DOT number after Sept. 30, as previously noted.)

Get insurance. Pricing primary liability insurance can be done at any point. A general rule of thumb is that, after filing your business type with your state, get quotes from different insurance companies to assess affordability. Rates will vary depending on your driving record, your state of residence and where you plan to operate.

Owner-operators who’ve made the move relatively recently toward their own authority report wildly varying quotes – from $8,000 to $20,000 annually. Regardless of your driving record, as a new business you’re viewed as risky, and you’ll pay accordingly. Operators have reported primary liability rates falling to between $5,000 and $6,000 as their businesses became established. (See Chapter 22 for more about liability insurance shopping.)

Once insurance is secured, have the agent file the appropriate BMC-91 form with FMCSA as proof of insurance.

Designate process agent.

The process agent you select will be the entity upon whom court papers may be served in any proceeding against your business. Use FMCSA’s form BOC-3 to designate your process agent. Make certain the process agent is authorized to cover you in every state in which you operate. OOIDA functions as the process agent for many of its members. Process agents may charge a startup fee and cost around $100 annually. FMCSA maintains a list of process agents, organized by the state where they’re based, on the Registration and Licensing portion of its website.

Complete UCR. Complete your Unified Carrier Registration via the central hub at UCR.in.gov. The fee is $76 for carriers with one or two trucks, rising from there for more power units.

Do truck signage. Federal regulations require any truck to have the following on both sides in a highly contrasting color: 1) The legal name of the motor carrier operating the truck as listed on form MCS-150. 2) The DOT number issued by FMCSA, preceded by the letters “USDOT.”

If you want to include your name or any other name that differs from the exact business name, the words “operated by” must precede the legal name and identifying DOT number.

OTHER NEEDED FILINGS

Heavy Highway Vehicle Use Tax and International Registration Plan.

If you are obtaining plates in your base state, you’ll need proof of payment of the annual federal HHVUT, which varies according to weight under load.

State fuel taxes.

See Chapter 9 for more on the IFTA program.

State use taxes.

Oregon, Kentucky, New Mexico and New York also levy separate use taxes you’ll need to track. Oregon requires monthly in-state mileage reporting, Kentucky and New Mexico quarterly. All three levy so-called “weight-distance” taxes. New York’s is similar but with more complicated calculation.

Plan compliance duties before going independent

One major mistake many owner-operators make when considering the move to run under their own authority is to underestimate the total cost of operations. It’s easy to look at a load board and dream about getting those rates posted and not sharing them with your carrier. It’s another matter entirely to end up making less than you do now because of all of the additional costs.

Consider these areas and decide if you are going to do them yourself or pay somebody else to do them:

•Rates and lanes
•Compliance
•Safety
•Drug testing
•Hours of service
•Accounting
•Fuel tax
•Mileage tax

Compliance, safety, drug testing and hours of service fall under FMCSA regulations. Addressing these can cause a lot of stress and confusion. Also under FMCSA is the new-entrant safety audit. Make sure you are up to date on what this includes and that you have a plan before getting started.

New entrants to trucking face a shortened deadline for correcting problems in their applications. Applicants must submit a corrective action plan within 15 days of the audit or, in some cases, 10 days. Have in place a drug and alcohol testing program, as well as one for keeping hours-of-service and vehicle maintenance records.

A carrier often handles tax filings for its leased owner-operators, but now you are the carrier. You are responsible for accounting for income and revenue for federal and state tax purposes, fuel tax, mileage tax and heavy vehicle use tax.

Also, it’s possible that you would be better off forming a limited liability corporation (LLC) or an S Corp for tax reasons before getting your own operating authority. Explore the question of tax structure with your business services provider before starting the application process.

When you are operating as a carrier, you won’t receive 1099s for the revenue you generate. You’ll need an accounting system that tracks all income and expenses.

Other crucial preparations include developing a system for invoicing, accounts receivable and tracking fuel and mileage taxes. The latter two require filing the appropriate forms. You’ll need to track all miles traveled in each state, as well as all gallons of fuel purchased in each state, in order to file your IFTA forms. You also may need to file mileage tax forms in New York, Kentucky, New Mexico and Oregon if you travel in those states in any given quarter.

This may sound like a lot of work, and it is. Don’t make this decision lightly. It can be a great opportunity if done right, but it can be your worst nightmare if you fail to plan and execute properly. If you still are interested in becoming a motor carrier, then create your plan, figure out the costs, create your budget and follow through.

‘Do or die’ preparations for the New Entrant audit

After filing for authority successfully, you are responsible for buttoning up your business. Recent FMCSA stats show more than 80 percent of new entrant audits have been conducted on time – within the carrier’s first 18 months of business. It’s critical you put into place evidence of your attention to compliance and safety management. Critical areas of focus for new entrant audits include driver qualifications, logs, maintenance programs, a filed and up-to-date accident register and written drug and alcohol policies and procedures.

Any of the following violations will result in an automatic failure of the audit:

•Failing to implement an alcohol and/or controlled-substances testing program.

•Driving or using a driver with an alcohol content of 0.04 or greater.

•Using a driver who has refused to submit to an alcohol or controlled-substances test.

•Using a driver known to have tested positive for a controlled substance.

•Failing to implement a random testing program (see No. 1).

•Driving or using a driver without a CDL.

•Driving or using a driver with a suspended, revoked or canceled license or a federal disqualification.

•Allowing a disqualified driver to drive.

•Not carrying appropriate insurance, including minimum cargo ($5,000 per vehicle and $10,000 per occurrence) and $750,000 primary liability.

•Knowingly using a physically unqualified driver.

•Failing to require a driver to keep record of duty status current.

•Running a vehicle declared out of service before repairs are made.

•Failing to correct out of service defects listed on vehicle inspection reports before further operation.

•Running a truck not inspected periodically.

Small fleet expansion

The long-term goal of many independent owner-operators with their own authority is to expand the business to more than just the single truck. Often, the prime focus is to raise capital to invest in additional trucks, but some veterans have discovered that such an approach could be faulty in that it puts the equipment before the most important part of the equation — the driver.

For a small fleet operator who still drives, finding a self-starter with a passion for trucking is key. Absent employed dispatch and in-house maintenance personnel, and given the time constraint placed on a small fleet operator who still drives, the employed driver will need to be able to manage his time, loads and truck maintenance. These considerations could be the lynchpins in long-term profitability.

In 2016 polling of Overdrive readers, the largest share of respondents (43 percent) reported belief that the driver was the most important part of the expansion equation, whether access to the truck precedes hiring or not.

A smaller group (16 percent) said having the truck first can be a good recruiting tool with any prospective hire.

The Business Manual for Owner-Operators
Overdrive editors and ATBS present the industry’s best manual for prospective and committed owner-operators. You’ll find exceptional depth on many issues in the 2021 edition of Partners in Business.
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