Over The Road Owner Operator Truck Leasing Startup Financing

Lessors are generally interested in four key areas when signing a truck equipment lease application:

1) Credit history of the applicant(s). The landlord wants to be sure that the guarantor has a history of paying the landlord’s bills and does not have liens that would take precedence in the event the tenant faces some financial hardship and is unable to make payments.

2) Time in business (TIB). The lessor is looking for at least 2 years in business in order to confirm that there is a sufficient monthly income stream generated by the business to make payments on the trucks.

3) Cash Reserve in the bank. Once again, the landlord is concerned about the tenant’s ability to make payments in the event of a drop in the income stream. Landlords often look for bank reserves that are at least consistently equal to the amount of the monthly payment.

4) Type of Truck. There are all kinds of work trucks. Without naming all the types of trucks that can and are financed by lease, suffice it to say that ANY truck/trailer on the road is the riskiest for a lessor to finance. Because? Simply put, the nature of being on the road for many hours each day on the open roads makes it risky for a lessor to finance the purchase. The risk of the truck being involved in an accident is greater for the lessor. While the truck is always insured, there is also increased risk to that equipment due to the hazards of the open road.

Memo: Depending on how conservative the lessor’s underwriting parameters are, there may be other screening items that are considered for a truck lease application. However, these are the top four considerations that an owner-operator must understand/address before applying for lease financing.

Let’s look at each of these four underwriting elements and determine what, if anything, the owner-operator can do to offset any negative derogations.

1) Credit history. Regardless of the nature of the business, this is an important element, if not THE MOST important, that can get the new trucking company turned down. This credit hurdle must be cleared before any hope of obtaining lease financing can be achieved. However, there are ways to make up for a low credit score.

The easiest and safest thing for the landlord is to have co-guarantors to secure the deal. Some landlords are more specific about who can be the co-guarantor. Some will want a co-guarantor from the trucking industry, with a track record of success. Others are less specific and will accept anyone who has a good credit score and is willing to co-guarantee the financing.

Keep in mind that some landlords have a very mechanical scoring method to determine whether or not all guarantors have sufficient credit depth to qualify. Other landlords are not as concerned with the hard score (FICO) as they are with the STORY behind the score.

So if you get turned down, try another leasing source. Don’t overlook alternative sources for lease financing. There are other sources besides banks or the captive leasing arm of the truck dealer. These alternative sources are always more flexible in their subscription parameters. There are sources that will even lease and finance private party transactions.

2) Time in business (TIB). Without enough TIB, landlords don’t have a track record with the company that gives them a warm, fuzzy feeling that they’ll get paid. Therefore, in addition to the truck being leased, the lessor (those who will) will seek additional collateral to secure the financing.

This will often need to be real estate (considered the most secure form of collateral). Others will accept equipment that is 100% owned by the lessee. Keep in mind, however, that landlords will often limit Loan-to-Value (LTV) to $0.25 per dollar on used equipment.

Some landlords will accept sole proprietors with 2 years in business if they can show TIB with 2 years from Schedule C of their tax returns AND the owner is willing to reorganize as a Limited Liability Company (LLC).

3) Cash Reserve. Since the trucking company is new, there may be little cash reserve in the bank. There are exceptions to this, as some new trucking companies are well financed and have anticipated lessor requirements in this area. In the absence of the required business reserves, the owner(s) or co-guarantors must have sufficient reserves in their personal checking accounts.

Some landlords, who are less conservative, will sometimes accept personal reservations to make up for a lack of business reservations. This is one of the reasons that guarantors have to personally guarantee the financing of the lease.

4) Type of Truck. There is no solid trade-off for the risk of a highway truck, other than the three areas mentioned above. The stronger the other 3 elements, the more apt the landlord will be to approve the start-up of the owner-operator trucking company. Additionally, some conservative lessors insist that the new trucking company be organized at least as a Limited Liability Company (LLC), to further protect the company’s assets.

In short, long-haul trucking companies that start out as owner-operators can obtain lease financing to purchase their trucks. However, they need to focus on these four areas and build on the strength of each of these key elements to increase their chances of getting approved. If you are weak in any one area, the other areas have to be very strong to make up for that weakness. Regardless of which lessor will ultimately finance these types of transactions, the lessee will not enjoy bank fees due to the risks involved.