Guide: Commercial Fleet Financing 101

11 min read
commercial fleet vehicles on the road

Executive Summary

Now that you’ve decided to purchase a commercial fleet, the next step is to get financing to fund your business. Commercial fleet financing companies are financial institutions that specialize in commercial fleet financing - fueling your tremendous growth. Commercial fleet financing can be a good option to purchase your fleet, to provide investment into your trucking business’s growth.

Disclaimer: Our first priority is giving you the best financial advice for your business. Tillful may receive compensation from our partners, but that doesn’t affect our editors’ opinions or recommendations in the content on our website. Editorial note

Trucks are the quintessential mainstay of American highways. After all, nearly every good consumed in the U.S. is put on a truck at some point! According to the American Trucking Association, the trucking industry hauled 72.5% of all freight transported in the United States in 2019. Whether you dream about having a fleet of trucks at your fingertips to conquer the roads or are simply looking to power up your small business, this article will be an informative guide to introduce you to all your financing options, and to help you make the key strategic financial moves and decisions to fuel your trucking business.

Regardless of if you are looking to have a company fleet that operates locally, or one that delivers goods and services across state lines, there are some key considerations to think about first. Before we get into insurance requirements and the types of fleet financing available on the market, let’s start with one big question trucking business owners need to answer first: should you lease or purchase your commercial vehicles?


To Lease or Not to Lease

The Pros of Leasing Your Trucking Fleet

A major advantage of leasing commercial vehicles is that it helps you free up working capital for other uses which could be more important or profitable. Rather than sinking a significant sum into the purchase cost of a vehicle, the leasing model only requires you to pay for the use of the vehicle over some period of time. Generally, this payment is made on a monthly basis which can help improve the cash flow of your business, as your working capital is not stuck in assets. The return on freed capital often exceeds the cost and interest associated with financing a vehicle purchase, which is why this model can be particularly popular.

This is unlike ownership of the vehicle where a purchase requires a huge financial commitment. According to the Truckers Report, a new truck and trailer can cost over $150,000 and the average annual cost to keep a commercial truck in a fleet is $180,000. That works out to be an average of $1.38 for every mile. While some would justify this purchase as an investment, it is important to keep in mind that trucks are depreciating assets. This means that in addition to the upfront costs (either cash or debt from financing) associated with buying a truck, your trucking business will also take yearly deductions on the value of the vehicle as it depreciates.

Another major advantage of the fleet leasing model is that the burden of ownership-related accounting is shifted from the lessee to the lessor which reduces your administrative cost. Sometimes the leasing company’s insurance will cover expenses such as routine maintenance and basic repairs, and you will not always be held completely liable for the truck (though this depends on the contract). Depending on your lease arrangement, you may be able to cycle out the vehicles for a newer model at the optimal time for a smoother driving experience. After all, nobody wants to drive a vehicle that could break down at any moment.

The Pros of Owning Your Trucking Fleet

Owning your own fleet does have its benefits, particularly if your business allows for a low vehicle turnover rate and does not need to prioritize vehicle replacement flexibility. First of all, you do not have to worry about penalties and fees if you exceed the mileage cap in a leasing agreement. On the side of maintenance, you don’t have to adhere to possibly strict timelines for maintenance or repairs in leasing agreements, and instead, you would have the flexibility to choose where you take your vehicle for service. Furthermore, not being under any legal leasing contract means that you, as the rightful owner of the truck, are free to decide when and how you would like to transfer, replace or dispose of the depreciated vehicle when the time comes.

Even though, as previously mentioned, trucks are depreciating assets, you will still be earning equity with every finance payment (or have it in full if you purchase the vehicle with cash), and the depreciation of company vehicles is tax deductible. It's also possible that the total cost of ownership may be less than under a vehicle leasing arrangement — you'll have to do the math to see the impact on your bottom line (more on that later).

There are those who still find it cost-effective to purchase their own fleet in spite of depreciation risk and tying up cash flow. This is particularly true for larger trucking companies who have in-house fleet management that are experienced with maximising economies in maintenance and replacement of the vehicles. For them, the scale of their fleet generally means that insurance loan packages are more affordable than leasing each of their fleet vehicles.

A Note on Fleet Insurance

On the topic of commercial fleet insurance, there are federal requirements of the minimum insurance coverage amounts, dependent on the vehicle and cargo being driven, that the fleet owner has to meet. The more dangerous the cargo, and the heavier the truck, the more coverage drivers are required to have.

Minimum commercial truck insurance limits are currently:

  • $300,000 for non-hazardous cargo in trucks under 10,001 pounds
  • $750,000 for non-hazardous cargo in trucks 10,001 pounds and over
  • $1 million for oil being transported by for-hire/private carriers
  • $5 million for other hazardous materials or explosives being transported by for-hire/private carriers
  • Additional cargo coverage for household goods being transported, $5,000 per vehicle/$10,000 per occurrence

According to Progressive, the national average monthly cost for commercial truck insurance ranges from $795 to $931 per month. However, there are insurance firms that will offer discounts if you are insuring more vehicles.

How to Decide Whether to Lease or Buy Your Trucking Fleet

Overall, you will need to assess whether it's more financially viable to purchase or to lease vehicles. As a general rule, you need to calculate if the opportunity cost of purchasing is lower than that of leasing as this will help guide your decision. It comes down to a return of investment calculation.

Assuming that a new truck has a capitalised cost or a beginning book value of $30,000 with a monthly depreciation rate of about 1.67% or a year-on-year depreciation rate of 20%. After, let’s say five years of use, the salvage value of the truck is $5,000. If you were the owner of the truck, you would have to fork out $30,000 upfront. However, if you were leasing the vehicle, you would need to pay the depreciation value of $25,000 across 5 years which would amount to about $417 a month.

For most business owners, the leasing model is popular because many would prefer to unlock their working capital and have a better cash flow to improve the business than have it stuck in a depreciating asset. Having said that, do take note that a leasing model also means that you have to play by your lessors’ rules. There are open-end leases and closed-end leases, and these can vary in their terms. Some leasing contracts have caps on the number of miles per year, interest rates can vary between fixed or market rate, and not every contract allows you to break the lease any time.


Fleet Financing: Your Options

Now that you’ve decided if you prefer to purchase or lease fleet vehicles, the next step would be to take a look at the types of financing available to fund your business decision.

There are companies or financial institutions that specialize in commercial fleet financing. Apart from the usual factors to be assessed such as credit score and business plan, there are a unique factors that determines eligibility for the specialized vehicle financing loan such as the following:

  • Time in Business with a CDL License - 3+ year preferred although they are able to finance start-ups as well
  • Down Payment Amount - how much your business can afford to put down on your vehicle

Additionally, commercial truck financing companies typically require you to have comprehensive insurance coverage in order to get approved for the loan. This includes liability coverage, physical damage coverage, bobtail coverage for non-trucking use, cargo and storage coverage as well as coverage for your employed drivers.

Truck-Specific Bank Loans

For small to medium-size businesses with strong credit, you have the option to look at commercial truck loans from large national banks. These tend to offer lower interest rates and longer repayment terms than online or speciality lenders.

One such example would be Wells Fargo’s transportation financing and refinancing options. As they have a partnership across many players in the trucking industry, you will have the option to choose between operating leases, standard or modified Terminal Rent Adjustment Clause (TRAC) leases, equipment lines of credit, lease-purchase agreements, or dealer retailer finance programs.

The typical loan repayment terms which range from 12 to 84 months can extend up to the expected lifespan of the truck which is helpful for you to segment your month on month revenue to pay back the loan. Interests rates range between 7% to 30% depending on the applicant’s creditworthiness and if you are applying for a term loan or a line of credit. Hence, we recommend business owners with a strong credit profile of at least 700 and above, to look into this as an option.

Truck-Specific Alternative Loans

However, if you are new in the trucking business and your credit score is below 700, there are other available options for you to look into. Alternative financing lenders do provide financing solutions for semi-truck purchases as well. These tend to have a lower minimum credit score, but they may have higher interest rates and shorter loan terms.

A good alternative lender option would be Upwise Capital. They offer multiple ways to finance your commercial truck, be it via equipment financing loans, credit lines or working capital loans. They have a relatively lenient application requirement - applicants need only a minimum credit score of 550 which is significantly lower than the general 700 threshold. Companies need to have at least 6 months in business although they encourage start-ups to apply if they have a good credit history. An important criteria to take note is that borrowers need to prove that they meet the $100,000 annual revenue requirement. Submission of financial statements and tax returns are required alongside commercial truck license and proof of insurance.

Loan terms can range between one and eight years. Although most alternate lenders offer a maximum of five years, the higher limit of eight years may still be insufficient to cover the lifespan of the truck. Additionally, interest rates start at an highly attractive rate of 4.95% but this is very much dependent on your financial profile and creditworthiness.

Small Business Administration (SBA) Loans

The Small Business Association (SBA) guarantees many types of loans through their banking and other lending partners. The best fit for fleet solutions would probably be the SBA CDC/504 loan which provides long-term, fixed rate financing of up to $5 million dollars for major fixed assets that promote business growth and job creation. The loan terms vary from 10 years to 20 and 25 years and the interest rate totals approximately 3% of the debt and the rate may be financed by the loan. Companies that are eligible for this loan must minimally be a United States for-profit company with a tangible net worth of less than $15 million as well as an average net income of less than $5 million after federal income taxes for the two years preceding your application.

Equipment Financing

Trucks generally qualify as equipment, so another option to look into would be an equipment financing loan. These loans provide financing for fixed assets such as machinery, computers and vehicles. The equipment itself could serve as a collateral and reduces the need to secure the loan. Moreover, these loans tend to accommodate a longer repayment schedule so you would not need to cough up an oversized up-front investment.

One such example is the equipment financing loan offered by National Funding. The equipment-specific loan provides up to $150,000 and can be used to cover the cost of buying or leasing new or used equipment (like a truck fleet). Another perk of National Funding is that they only require a minimum of six months in business. Plus, if you don’t qualify for equipment financing just yet, the team will help match you to another option, such as a business loan for poor credit, or their commercial vehicle fleet financing. Their equipment financing loan also comes with no down payment.


Last Word on Fleet Financing

There isn’t a one-size-fit-all solution to fleet financing. Fleet financing strategies tend to take into account factors such as the asset needed, the length of its lifespan, and how you would wish to pay for the use of the asset. Within the option of leases itself, it can vary in terms of how it is structured to meet needs such as mileage usage and cash preservation.


About the author

Ken So

Written by Ken So

Ken is the Founder and CEO of Flowcast and Tillful. Having spent most of his career before Tillful in tech and investment banking, he covers all things business credit and finance with a twist of insider knowledge.

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