Lease/Purchase Tips

When you give up the security of being a company driver you become an independent contractor/owner operator/whatever you want to call yourself. If you obtain your truck through some type of lease arrangement whether through a trucking company or third party vendor that is your chosen method for obtaining your equipment to operate your business. There are some good lease plans and some very, very bad ones so be very careful. There are advantages and disadvantages to leasing, cash purchase and traditional financing. A lot of people look at me like I'm crazy when I tell them the truck is actually the last thing on the list of starting your new business, not the first. You have to have a budget to know how much truck you can afford. If you can't afford truck payments of a thousand a week, don't buy or lease a truck with payments of a thousand a week.

As far as taking whatever load they offer you and not going home your budget will determine how much time you spend at home and how often you get there. If you need 400 miles a day to break even you can't afford too many days with 300 mile loads. It is true that sometimes a short run puts you in a spot for a much longer run so don't refuse a shorter run out of hand. Hometime has to be planned. Many drivers I've talked to stay out three weeks and then go home for one. Personally I'm out 15 to 17 days and home for 4-5. I could make more staying out longer, but I also have obligations to my family to be a presence in the home. This was one of the reasons I made the switch. I'm the one with the vested interest in providing for my family financially and emotionally. I now have the freedom to balance these needs and adjust my schedule based on which need is greatest at the moment.

I started by listening to Dave Ramsey, Kevin Rutherford on xm, and reading a lot. I also spent a lot of time talking to the Owner/Operator manager at my company. I then tracked my numbers as a company driver for over a year. Once I was satisfied the numbers were workable I made the switch. Don't get in a hurry to make the switch, learn about business, learn about the business of trucking, get your personal finances under control and learn the word NO. No to loads that aren't driver friendly, no to trucks that are out of your price range, no to a truck that is worn out before you even get in it, no to signing any lease or agreement you aren't ready for or don't understand.

 

First off if its a L/P through the company your leased to its not your truck, sorry! All they have to do is say......."You're Fired" and its all over!

Secondly, if your getting paid %, know what it pays before you haul it!

Thirdly.................... DON'T DO IT!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

 

Here is a news flash from someone who is doing a lease with option to buy through his company. Unless you buy a truck outright you do not own the truck. In a lease you are renting the truck which usually means 100% of the payment is deductible. A lot of so called leases are just traditional financing masquerading as a lease so be very careful.

If you are pulling for any company that is going to steer freight away from you just to starve you out or is going to fire you just so they can get their truck back you are with the wrong company to begin with. The reason trucking companies use owner/operators is because it is the most profitable freight for them. Most freight is computer dispatched, with my company I see the preplan load before my dispatcher.

 

Dave I finally came up with something that might be worth posting in your thread.

PREPARATION

Not to be negative but at least 3 times as many will fail as succeed. Plan well. Get at least a year, if not two of experience before you do this. Get a spreadsheet and track your expenses on the truck you are driving. You will use this spreadsheet to calculate your Cost Of Operation in CPM (Cents Per Mile) when ready to start up.

Keep track of what the company spends on the truck and what you spend on living expense on the road. If you can't find the time to track the costs, you aren't ready to run your own business and that is what a lease/purchase is.

Take some online business classes and learn about Business Plans, Income Statements, Balance Sheets and Cash Flow Statements. Find a computer program that will allow you to track expenses and revenue and generate common business reports and projections.

You need to be able to look at each load and figure out whether it is profitable. You can't afford to wait a month to find out you haven't been profitable. If you run short, driver wages are the only thing you can short. Nobody else will wait to be paid.

Save some money for when you start out. Now matter what you make, if you can't save some, you probably aren't ready yet. Chances are you will make little more on a lease/purchase than you are making in driver wages, at least to start with.

Track and record your miles between fill ups and gallons used if possible. This method is more accurate than the on-board computer. Dividing miles by gallons gives MPG. Dividing fuel cost by MPG gives cost in CPM. Example: You travel 1206 miles and use 185.6 gallons at $3.95 per gallon; that is 1206 miles / 185.90 gallons = 6.487 MPG; 3.95 per gallon / 6.49 MPG = 0.608 CPM. So your cost per mile for fuel is 0.61 CPM.

Now try different methods of saving fuel while operating within the specifications of the engine. Try pedal instead of cruise. Try running a few MPH slower. Try progressive shifting. Try to keep the RPM 100 less or 100 more when shifting on pulls. Fuel is the biggest cost so if you can save a little it will make a big difference.

EXECUTION

Be sure to work up a spreadsheet that calculates your cost of operation. Compare costs to revenue to determine feasibility. Run scenarios for when you take home time and see if you will have negative statements. OOIDA has some spreadsheets and so do I.

You need to look close at the lease agreement. Make sure it is walk away. I would also look for a buyout at completion that is from a few thousand to $1. Make sure the trailer rent is reasonable. Compare what they furnish and how much you pay for what they charge back such as license, permits and fuel tax. Compare what they require you to escrow for repairs and maintenance. Make these comparisons to various companies.

It is rumored that there are a few, not many, lease/purchases that require no payment when the truck doesn't run for short periods or that split gross revenue as a percentage to the truck and a percentage to the driver. Either of these would lessen the impact of down or home time and the negative balance that both often create on the weekly settlement.

Some companies exercise little control over your repair/maintenance escrow account and some control it like it's theirs. Some pressure you into having work done at the terminal and sometimes it isn't the best quality.

I believe that percentage pay is better than mileage. It will require more research to do projections. It will also require you to be better at picking loads and controlling deadhead. I don't know if any lease/purchases are percentage though.

You should also have a cash reserve to cover your personal living costs, in case of break down or slow freight and for home time. If you spend 4 or 5 days at home or broke down you will have a weekly lease payment due before you can generate the revenue to pay it. That means no check this week and a small one next week because this week's payment or a portion of it was carried forward.

Be sure you find and talk to drivers who have completed a lease/purchase. The company holds all the cards. It is imperative that you maintain a good relationship. You need to keep disputes to a minimum and resolve them quickly and in a civil manner.

One last thing, you are now an independent contractor for tax purposes. You will be required to save money and pay quarterly payments. You need to pay IRS quarterly for Income Tax and Social Security. You need to pay your state, if they have Income Tax, quarterly also. Based on my calculations this will vary between 4% and 8% of gross revenue or between 0.06 - 0.13 CPM. These quarterly payments will most likely be around $1,500 - $3,000 per quarter.

If you don't pay enough in, you will owe interest and penalties. In addition, you will likely owe so much that you won't be able to afford to pay it all at once. This will vary greatly depending upon your tax situation and your equipment and expense deductions. You need a tax professional to help you calculate this unless you understand the mechanics of taxation. There is an owner who is leased to Crete posting on this forum that paid $13,388 last year to IRS. His truck is depreciated out so taxes wouldn't be that much for the first 3 - 4 years.

If you buy a truck and finance it, you own the truck and the title will be in your name. If you lease or lease/purchase a truck, you do not own it until the contract is complete and the buyout is paid, the sellers name is on the title.

 

Thanks Dave! I have to watch that I'm not too negative. It's just that you don't really have to preach about the positive things, most of us can see them right away. I expect the worst, plan for less than ideal and hope for the best.

While I don't think lease/purchases are a good deal, I believe that you can make them work. I believe you will work very hard and have to be very good at making decisions and controlling costs. In short, if you are willing to run more miles than you should have to, it's possible to do it.

I think you have to make sacrifices but it can be a way for a person to get a start with little investment. Since nothing is free, one should expect to pay in blood, sweat and tears if they don't have the cash. It can also be a transition to running your own operation. If you can come up with the cash to purchase a truck and lease it on, you can make it easier on yourself and increase your options and opportunities.

If people would approach this business like building trades they would be much more successful. For an HVAC license you need 3 - 4 years as an apprentice to take a skills test for your journeyman license. Then you need 1 - 2 years as a journeyman to take a skills test for your master/contractor license. You also have to take a business test for the master license. Most of the failures in OK were related to the business part.

 

Two really good tips from Preacherman which I highly recommend!

1 - Dave Ramsey. Want to be successful, listen to this guy every day!

2 - The most absolute best thing you can do besides save your money in order to prepare yourself as an O.O is that when you are driving company do everything and keep track of everything as if you were an O.O! There is no better to do it! Combine this with Dave Ramsey and some online business courses and you are heading in the right direction to become an O.O

 

I just heard a statistic by from the SBA that 90% of all start-up businesses fail within the first year. The danger of lease purchase is that most companies, even those with good programs won't usually vet people wanting to lease a truck. That means an awful lot of people who aren't ready to start a business make a huge financial commitment with no idea what they have just committed themselves to. It's not just that leasing a truck can be a tricky way to invest in equipment, it's that it sets the unprepared up for not just failure, but disaster.

Just an aside, in the final analysis trucking is nothing more than a package delivery service on steroids. Every business has the same decision to make when it comes to obtaining the equipment necessary to operate their business. Unless the lease agreement is a total disaster, it will not be the downfall of your fledgling business. Most fail, but many succeed. If the lease was the determining factor and they are all as bad as some think, then everyone would fail.

 

Preacher you hit the nail on the head, companies do not vet potential lease operators. They will lease a truck to anyone, because it does not really hurt them if it goes sideways. Yes they might incur some expense to recover the truck, and maybe make some repairs, but nothing compared to the harm you can do to your credit. Most guys do not go into this with a solid buisness plan, or any plan for that manner... I wish these guys luck with being a lease operators... I just hope that they are doing it the right way, and not just seeing chrome and polished stainless, and jumping in with both feet with no clue... Alot of colleges offer business plan assistance for free, all you have to do is ask. Another resource is OOIDA, and Landline Mag. They have great advice from experts in the industry. There is no harm in learning from someone else's mistakes. Take as much help as you can get, and use it and learn from it.