If you've been “driving truck” for a few years you've likely dreamed of someday acquiring your own rig and going into business for yourself. Of course, you don't need to win the lottery in order to realize this dream, but you do need to raise the money required to purchase the tools of your trade; your rig.
Becoming an owner-operator can be a rewarding move, both professionally and financially. But as the old adage has it, it takes money to make money -- unless you've saved up enough capital to purchase a truck outright with cash, you'll need to secure financing before you can get your new operation rolling.
If you’re a new entrepreneur looking to get into the trucking business for the first time, the prospect of finding a lender to finance your dream might seem a little daunting. In this article, we'll discuss what you'll need to qualify for truck financing as an owner-operator, and how to get the best rates from your lender.
First off, the process of financing a commercial truck isn't quite the same as applying for a personal or conventional business loan. While they share similarities, a traditional small business loan lender will typically rely on your personal credit history, your business's revenue stream, and the amount of time you've been operating to determine your eligibility for funding.
With a commercial trucking loan, however, the truck you purchase serves as your collateral, minimizing the lenders risk, which of course greatly improves your chances of qualifying. For the same reason there's usually more variation and flexibility with the terms of commercial truck loans, which also works in your favour.
On the less positive side, however, where banks are usually your best bet for a traditional loan, most conventional lenders (banks) won't fund commercial trucking businesses because of the significantly high failure rate within the industry. Many consider aspiring owner-operators as just too risky to take on as customers.
This means you'll probably need to pay a higher interest rate and procure the services of an alternative lender in order to get the money required to buy your truck.
So far as qualifying for a truck loan is concerned, much will depend on the specific truck you want to buy along with the various rules and regulations of the lending companies you approach. Nevertheless, there are a few basic guidelines to follow that should greatly improve your chances of being approved.
Unless you have stellar credit and considerable financial resources, you will be required to put some money down on a commercial truck loan.
In Canada, the average down payment on truck financing ranges from 10% to 30%, based on the strength of your application. For example, your loan application will score higher if you can show lenders you have enough money to afford your loan payments as well as all the associated expenses that come with being an owner-operator, such as vehicle repairs, insurance, etc. The more money you're seeking to borrow, the more resources lenders will want you to have, so if you don't have a lot of capital to draw from, purchasing a smaller truck to get your trucking business established might prove to be more pragmatic than applying to purchase a brand new 40-foot semi.
As a general rule, the weaker your credit score, the greater the down payment you'll need to procure.
More than any other factor your credit score will dramatically impact your ability to qualify for commercial truck financing, particularly when you’re just starting out as an owner-operator. You'll not only find it easier to secure a loan for your trucking business with a high credit score, but you'll be able to negotiate better repayment terms as well, potentially saving you a substantial amount of money over the long term.
For example, if you have stellar credit, even as a first-time owner-operator you could potentially qualify for 100% financing at a lower interest rates than others.
Given how important it is, you would be well-advised to check your credit score before approaching lenders for financing. Should you learn your score is lower than would be ideal, there are a few things you can do to improve it.
For starters, CBS News reports that four out of five credit reports contain false information, so just by correcting any potential errors on your own report you could see your score improve. Paying off any current debts you have will also help, but more importantly, do not apply for any loans or credit until you know your score has improved to where you need it to be.
Every failed credit application takes a few points off of your score, so if your numbers come up disappointing, remember that they're only going to get worse if you keep chasing credit before you've improved your profile.
While a good credit score is crucial, there are other elements lenders look for before approving commercial truck loans, so your goal should be to eliminate as much risk as possible in the eyes of potential creditors. Here are a few suggestions.
- The more truck driving experience you can demonstrate the better, even more so if you can show a consistent revenue stream stemming from it.
- Ideally, the further back a lender can look at your credit history should help your case -- over seven years is optimal.
- A credit history of honouring fixed payments at regular intervals, as you would with a mortgage or vehicle loan, is typically beneficial.
- Find a well-established co-signer. If you have a friend or family member with a good credit rating whose prepared to assume responsibility for the loan should you default, lenders will be far more apt to consider your application.
While securing financing for an aspiring owner-operator in Canada might seem intimidating, the bottom line is that so long as you meet the qualifications demanded by lenders, it's a relatively straightforward affair. And if you don't have the requisite credit score to be approved for a commercial truck loan right now, remember there are many things you can do to improve it so financing your trucking operation will be easier a year or two down the road.
Our experts can help first-time buyers obtain the commercial truck financing that fits their needs. Contact us to find out more.