When trucking company owners require on their small fleet of vehicles for deliveries and freight transportation, maintenance and growth are essential. Your business needs to keep up with your clients’ demands, but you cannot risk financial ruin due to growth that happens too fast or at too high a cost.
Your small trucking business has deliveries to make or shipments to transport to warehouses, ports, retailers, or factories. You cannot afford to have trucks breaking down due to age or poor maintenance. Working capital is critical. Learn how high interest rates impact financing today and how you can embrace strategies that help you stay competitive without taking on too much debt.
The Impact of Interest Rate Hikes on Your Growing Fleet
Back in November 1981, under Reagan’s presidency, auto loan rates soared to history’s highest point of 17.36%. They’ve never gone that high since, but they have climbed since their lowest point of 4% in 2015. Interest rate hikes hurt small businesses just as much as consumers.
As of May, vehicle loan rates are at 7.63%. Much of this is due to the continually high Federal Reserve benchmark rate. For more than a year, the Federal Funds Effective Rate remained steady at 5.33%. It’s slightly lower, but it hasn’t dipped below 4.33% for the past six months. This is keeping car loan rates high.
When interest rates are high, it costs more to acquire the things your trucking company needs the most. A loan on a new warehouse or garage costs more. Business credit cards cost more to use. Purchasing new trucks or trailers to update older equipment also drives up your monthly costs.
Because banks and credit unions use the Fed rate when setting their own interest rates, the loan rates you see are always going to be higher than the Fed rate. Your business credit score also determines what category of loan rates you qualify for. Trucking is already a challenging industry. High interest rates add to the strain.
Understanding the Common Fleet Financing Options
When it comes to replacing older equipment or growing your fleet, you have a few options. Each one is impacted by higher interest rates and rules.
1. Asset-Based Lending
An asset-based loan product is similar to a commercial vehicle loan. The difference is that you offer your current fleet vehicles as collateral. If you fail to pay for your new truck or trailer, they can take possession of your existing fleet to cover the unpaid debt. It’s riskier for that reason.
These are secured loans because you offer collateral. That makes your interest rates lower, which is beneficial. You’ll have the lowest rate possible considering your current credit rating and the bank you choose to get the loan from.
2. Commercial (Traditional) Vehicle Loans
Commercial vehicle loans are the traditional loans you’re probably most familiar with. You pay a monthly loan to the financial company. Once you make your final loan payment, the truck or trailer is yours to keep.
With a traditional loan, you have the truck once the loan is finalized and use it while making monthly payments for as many years as you’ve agreed to. Some of that loan payment covers the interest, and the rest covers the principal (truck cost).
When you purchase a truck this way, you might have a fixed rate or a variable (adjustable) rate. Fixed rates are higher, but you have a set monthly payment that won’t change. Variable rates are based on the interest rate that month. Your payment might go up or down depending on the federal rate.
Traditional loans are higher, so they take up more of your monthly revenues. If you hit a slower period when there’s not as much work, you may struggle to keep up with your loan payments.
3. Lines of Credit
Lines of credit are advantageous as you’re qualified for a certain amount, but you don’t have to use it all. Your business draws on the credit as needed, up to the maximum credit limit. For several months, you don’t pay more than interest. After that period ends, the payments of interest and principal begin.
Because lines of credit often have variable interest rates, your rate will go up if the prime rate increases. You also benefit from lower prime rates because the rate drops.
The downfall is that increases can make it hard to budget your monthly expenses. If you’re not certain how much your loan payment will be from one month to the next, that fluctuating payment becomes a hassle.
4. Truck Leasing (Operating and Capital)
Leases allow you to use a truck or trailer for a number of years in exchange for lower monthly payments. When the lease is up, you must give back the tractor-trailer or other commercial vehicle. If you want to continue using that vehicle, you need to make new arrangements.
There are two types of truck leases.
- Capital Lease: This works more like a loan as you are certain you intend to purchase the vehicle at the end of the lease. Think of it as a rent-to-own situation.
- Operating Lease: This type of lease is best when you plan to give back the truck or trailer at the end of the lease. It has smaller monthly payments and shorter lease terms.
One risk to an operating lease is that once the lease is over, the price of trucks may have soared, which means purchasing new vehicles is going to be harder. You don’t pay off the truck over time and get to keep it.
Tips for Keeping Your Trucking Company From High Levels of Debt
You can’t control the rates the bank sets, but you can be proactive when it comes to avoiding high levels of debt.
- Build strong cash reserves and have a strong cash flow.
- Carefully manage your existing fleet to maximize income.
- Have a hefty down payment ready.
- Maintain a positive credit score by paying bills on time and limiting accrued debt.
- Shop around to ensure you’re getting the best possible interest rate.
- Take advantage of alternative financing options like freight factoring and save up to pay cash for a new truck or trailer.
- Use government (SBA) loans and grants to your advantage.
When Will Rates Drop?
It’s hard to tell. Right now, the Federal Reserve is cautious about cutting rates for the foreseeable future. Federal rate adjustments are unlikely in order to protect against soaring inflation. While the current administration wants it to happen ASAP, cuts too deep could tank the economy. For this reason, expect interest rates to remain high.
Interest rate hikes make it hard to find the best financing for your small fleet. Sometimes, a combination of financial strategies works best to keep you from accruing too much debt.
Consider freight factoring arrangements and get paid the same day you make a delivery. You avoid high interest rates. Instead of taking out a loan, set aside cash each week until you have the money needed to pay cash for your new equipment.
Saint John Capital has decades of experience helping trucking companies grow. Our knowledge at building a trucking company from the ground up is unbeatable. Talk to us about our freight factoring options that help you keep a strong cash flow throughout the year and help you avoid high interest rates on business or truck loans.
