How to become an Owner/Operator

you sound like you've made up ur mind. U have not much to loose but ur pride if it doesnt work out for you. but your mind is on the right track. Go work for an O/O or a company that will hire you, to get the basic's. THAT'S WHAT I DID FOR 4 YEARS!!! I worked for an O/O to learn the basic's and I was in his shop looking and asking questions to LEARN. I give you my blessing's if YOU speak the truth on how you want to learn and proceed in this industry.
I word of advice, don't start a family till you make it cause it will take a toll in your life.

 

Here is some additional information on start-up and operational costs for becoming an owner/operator. I meant to include this in my analysis, since it did not affect my start-up costs, I overlooked it.

You need to investigate the tax costs of owning your own equipment. Most states have Sales Tax on equipment purchases and annual Ad Valorem/Property Tax on your equipment.

In my area sales tax run about .07433 to .08100. This is about $3500 - $3600 in sales tax that must be paid when you license your equipment in Missouri. You have to prove you paid this to get your license. On a full year base plate this can bring initial licensing costs to as much as $6000. In my state if you have your authority, they wave the sales tax. I didn't investigate whether this includes authority through a lease. I'm guessing not but I do not have any facts.

Property tax is due in some states around the time of purchase. I have very little in the way of facts or costs for other states. In Missouri, property tax is due on January 1 on any property you owned on that day. If it was in your possession on that day, you owe for the year. You have to prove that you paid this to get your license. If you purchase it during the year, you can get a waiver for licensing purposes the first year. It's been awhile since I have paid this on a truck, so I can't remember the cost. I would estimate about $100 a year and budget double. Missouri is lower on property tax and makes it up on real estate tax.

Hint: Starting in this business near the first of the year, when freight is historically in short supply, is probably insanity. Base plates for you tractor are prorated by the quarter in Missouri. Timing can save thousands and gain extra months on base plates. If I purchase a base plate on July 1, I pay one-half the cost of a year and get six months of use. If I purchase on September 1, I pay one-half the cost and get four months of use.

 

You make some valid points, BigJohn. My state doesn't charge property tax on equipment owned by individuals. They do assess a tax on corporate owned equipment. In my state, we don't have to pay sales tax on class 8 equipment if we have a MC number. If you live in the state and lease to a carrier you can use their number to save the sales tax.

 

Thanks G/MAN. I wasn't sure if leasing would work. I know when I was a young pup, oh so long ago, I was amazed when I bought my first decent car and discovered my $20 license plate would cost more than $250.

Not having to pay sales tax is great. So, the lesson in this information would be that there are losts of incidental costs that most of us starting out haven't even thought of. Cover all your bases. Also there are ways to cut those costs that I only learned about through experience.

Imagine how irritated I was the first time I paid for six monthes of base plates that I could only use for four monthes. It was a loss of $300 or 17% on a year's cost. Since I had been captured and escorted to the Strafford Missouri scales, the cost wasn't all that relevent in the grand scheme of the problems I had created for myself in fines and downtime.

 

A forum member sent me an email asking for a little more information on some of the assumptions used in my analysis. Since every regular on the forum is beginning to know me as the starving freelance writer that I've apparently become, I'll share this information with you. I'm sure it will come as no surprise, he asks four simple questions and I write a short novel in reply.

As always these are my thoughts and calculations based on my small amount of experience and my understanding of the facts gathered from my research. They are always up for correction by the many who have more experience and better facts and knowledge.

Here are the questions:

1) What was the purchase price of the truck?
2) What was the purchase price of the trailer?
3) What was the interest rate paid on truck/trailer?
4) What do you mean by "I may be forced into factoring"?

 

The price of the truck and trailer were not set in stone. The truck was between $25,000 and $35,000 and the trailer was between $10,000 and $15,000. Springfield Missouri has a huge trucking industry so there is plenty of equipment to choose from. At this point all my shopping has been online and by phone. I found that in the $35,000 - $50,000 range for both, I could find equipment that, in my opinion, would be nearly as dependable as new based on the main components that wear and the luck of the draw. The overhauled engine may only get 60% - 70% of the miles of a new one but at 30% of cost, it's still a bargain. There will be more repairs on incidental things on a used truck but major costs should be manageable.

Since I play with numbers all the time, I have a habit of winging it some and setting parameters to accommodate a variety of variables. To be honest, I was going on what I thought for interest, which was around 10%. However, I saw some MHC Kenworth numbers that were about 9.9% and the payments and length of note were close to what I used. Since I don't have a compound interest calculator and it is time consuming to do on scratch paper, I use a simple interest method at about 12% to cover the compound factor that you encounter on this kind of loan.

I was told 10-15% down with a credit score in the high 700's and a positive number on the personal assets. My thoughts were, if I have to do 15% down I have to find equipment for $40,000 or less to stay at the $6000 down payment. At 10% down, I can spend $50,000 and still meet the down payment target. If I went the higher cost, lower down payment I would extend the loan to 36 months if necessary to keep the payments on target. I have figured it several ways and I feel confident that I can meet or beat my projections in the end.

Factoring is a method of keeping your cash flow healthy. Many businesses use it, not just trucking, but that doesn’t make it a wise choice. Some people think of it as borrowing money to run on but that is not the case. It is a way to keep from borrowing capital to operate on and it usually costs more than borrowing. It doesn’t appear on your books as a liability though. Factoring allows you to get your money before the person that owes you pays you. Most businesses, and even individuals, pay their bills in 10 - 30 days. In a tough economy they will try to drag it out to 45 or more days and run on your money. It has always been like this and makes good business sense if you aren't on the receiving end.

All good brokers should pay in 15 - 30 days and many have a quick pay option, for a small fee, that pays in 48 - 72 hours. In addition, most will advance a percentage for fuel costs when loaded, again for a small fee. You used to be able to draw enough for fuel, tolls and food – basic operating expenses. There are many ways to get some or all of your money faster; you just have to watch the fees as they add up fast. If fees run 3% you give up about $500 per month or $6000 per year on my business model.

Now, let’s look at some numbers and why factoring may be necessary. If we run 9200 miles a month at a cost of operation of 1.80 CPM, we need a cash flow of $16,560 to meet all our costs for the month. Let’s say we have done better than average and ran all our miles at an average of 2.00 CPM for a whopping $18,400 in revenue for the month. Now we should be happy with the job we’ve done. That leaves a true profit of $1620 (1840-220 money fees) for the month and we are on track to make a profit of $19,440 for the year after all expenses. Why don’t we have money to pay our wages?

We drew $7300+ in advances, $3700+ in broker quick pay, $1850+ for all the first week’s loads (these brokers settled in 21days) and spent $220- in money fees. We finished the month with $12,630 in revenue and costs were $16,560. We are in the red $3930, we have zero cash (here’s where that operating capital comes in) and we’re setting on $5550 (18400-12630-220) of unpaid invoices. This leaves us with $854 to pay our wages and benefits of $4784 for the month. In real life I doubt you will do as good as this collecting your revenue in any given month and certainly not the first month. Of course the first month you won’t generate revenue like this anyway. In my estimation, on a startup, you will easily be $6000 in the red by the end of the second month. At this point things should be starting to turn for the better as payments catch up to invoices.

Be careful with factoring. Most companies want you to sign away the farm. Recourse costs less but if the broker doesn’t pay, they debit your account for the previously paid freight. Non-Recourse means the factoring company will scrutinize the broker’s credit and pay record and more or less guarantee the payment. I would shop terms and rates. I would choose non-recourse but be aware there will be conditions when they may not stand behind the broker’s failure to pay. Find a factoring company that doesn’t require you to run every invoice through them. Just factor the ones you have to get paid fast, where the broker doesn’t offer quick pay. Move away from depending on factoring. The problem with this is if you started short on capital, it could take six months to a year to build up the cash to do this. And that’s if you are able to remain profitable enough to be able to build a cash reserve and avoid costly repairs.

 

Good post, BigJohn. There are a few things that I would like to add. When you purchase a class 8 truck three things will be considered by the lender. Your credit score is a biggie, of course. But, they will also look at your driving experience and where you plan on putting your truck. If you will lease your truck to a carrier then they may want to see a copy of the lease agreement. I have known of some who have paid in excess of 19% interest on a class 8 truck loan. Not all banks lend money on class 8 equipment. If you have a personal relationship with a banker it might make it easier to secure a loan with them. I had two lenders who didn't make truck loans who financed equipment for me. It is all in the wording of the loan.

I agree that factoring may not be best for the long term financing of your business. It is a good way to finance your business without incurring debt. I prefer non recourse factors since they can't usually charge an account back on you. You need to make sure to read their contract very carefully. Terms and rates can vary considerably. In lieu of factoring you may want to consider getting a commercial line of credit with your bank. The down side is that unless you are careful with whom you do business you could be left holding the bag should a broker not pay as agreed. One thing to look for in a factor is whether there are minimum monthly fees. Some charge, others do not. If you don't factor, then you should be prepared to bill the broker or shipper and follow up if you don't receive payment as agreed.

Not all brokers will advance money on loads. I would not expect to be able to get an advance, especially starting out. Some brokers will not advance money unless you have been in business for a minimum amount of time or until after you have hauled a certain number of loads for them without incident. There have been instances where new carriers have gotten advances and never delivered the load, so some are very cautious of new carriers.

 

This is a great thread, lots of valuable info.... I was going to start a thread to ask the question but this seems like a better place so here goes...

Would you consider leasing a truck on with a company a good middle step toward becoming an O/O? I DO NOT mean a lease purchase!

I am in a position to buy a good used truck outright for $30k to $40k and still have enough capital left over for a reserve maint fund and startup operating costs. I am not sure I want to jump into getting my own authority just yet, but I don't want to be a company driver either as I want to have some more freedom than that would allow. I know how to drive, drove from 1990 to 2003, various jobs with half that time as a OTR company driver, the driving is no problem.

Based on my understanding, I would only have Fuel and operating costs, as well as the tractor registration and bobtail insurance to worry about, the rest would be absorbed by the company I lease on with, is that correct?

I know my situation is different than most, and if any of these questions are absurd I apologize in advance. Any feedback is much appreciated.

Stay safe

 

If your wanting to get ADVANCES on your load, Then your not running your business correctly !!! Either your hauling CHEAP freight or your getting ready to go under. I NEVER get advances for any freight not to mention they will take more of a percentage if you do so. My regular broker pay's on the 1st and 15th, that suit's me find. Another broker I use has a system, they pay in 2 day's once they recieve the paperwork and take 1.5% for that.

 

get your own authority !!!!!!!!!!! Period !!!!!!!!!!