Top Reasons Why Small Trucking Companies Go Out Of Business
Transportation is one of the most lucrative industries in the United States. Trending into 2019, the estimated Freight Transportation revenue for the year is $813 Billion (FleetOwner). The question is still, why do so many companies fail in the first 6-18 months of starting their authority?
Before we dive into that, I think it is important to understand the makeup of the trucking/transportation industry. Here are a couple key facts:
80% of all cargo is transported by trucks
There are 1.3 Million Trucking Companies
90% of Trucking Companies Operate Fewer than 6 Trucks
$143 Billion a Year is Spent on Fuel in Transportation
Average Revenue Per Truck/Month is $20,000
So, if there is so much money and the industry seems to be booming.... why? After some research, being in the industry and asking around, I think it comes down to a few main things:
1.Not Enough Cash Flow
Sounds simple enough, right? Well, as obvious as it sounds, trucking companies close every day due to not having enough cash flow. The barrier of entry for someone to become an owner operator or run under their own authority is very low. Many new authorities are applied for by people who were leased on, so they own their truck on a lease purchase. Now, they need a new trailer ($40,000 approx.), insurance down payment ($2,000 approx.), legal start up fees, and cost of filing authority. Here's something to think about, if you were very good with your money and were able to save the whole $50,000 then now you have no operating cash flow when your authority activates. If you choose to finance and make a down payment, you better get moving soon because monthly installments are around the corner.
Now, the catch is that customers pay between 30-45 days after delivery! So, what do you do for the first 30-45 days for fuel expenses, the unexpected breakdown, the next monthly installments? It depends...most companies choose to factor their invoices. Factoring is the idea of selling your invoices to someone in exchange for same day payment; also known as a quick pay.
The key mistake most companies make is that they become dependent on the daily cash flow from a factoring company and do not offset their risks by saving money in an expense account for rainy days. So, at the first sight of a claim, a major breakdown, or an unexpected hike in a bill, they are forced to shut it down.
2. Hauling Freight That Doesn't Cover Your Costs
DON'T HAUL CHEAP FREIGHT! Once again, easy enough, right? Most small fleet owners and new authority carriers will disagree that this is easy. There are a few hindrances when it comes to finding good paying freight. A lot of the brokers with the freight require that your MC number must be of certain age before they give you freight. So, not only is it tough finding good paying freight but you may struggle to find any freight at the beginning stages of your business. That is why a lot of carriers are hiring dispatch agents to help them find freight.
MAKE SURE YOUR FREIGHT RATES COVER YOUR COST! One of the leading mistakes carriers make when booking freight is that they keep a 'rule of thumb'. For example, "I only take freight that is over $2.20/mile". Well, that is a great rule of thumb in most instances. But, that rule of thumb is a lot of times predicated on what they believe their hard costs per mile are and not a calculated amount. It is important to find out what your operating costs are, and what each load will have to pay to make sure you are turning a profit. Every load that goes to a different area, different commodities, different fees and permits, and different work load will have a different CPM (cost per mile).
What can be done to save money on some of the major costs of running a trucking business? One of the main expenses for owning a trucking business is fuel! It is so hard to determine if fuel prices are going up or down across states or variety in the season. Since fuel costs are such a variable and based off the strength of the current economy…you should do your best to always save in this area. Most reputable factoring companies offer a fuel card that save you money at the pump. Saving 10 to 30 cents on the gallon. So, not only can a factoring company make sure you are staying up on cash flow, they can also help you save on some necessary expenses.
3. Not Being Compliant with DOT and FMCSA
Every day carriers get shut down or put out of service for things that were preventable. Some of these things include hours of service, not the proper insurance, traveling outside of their jurisdiction, illegal freight, improper (or lack of) ELD, etc.
What do you do to make sure you stay compliant? I recommend hiring someone to do your compliance. A lot of people will see this as an added cost to their business. But what is costlier, being in business and paying a partner to help you stay in business or being out of business? The choice is yours.
Overall, there are many reasons trucking companies fail. I believe these to be some of the top few. If you need help with any of these things or need help with getting your trucking company started feel free to call any of my trusted references below.