Sept. 18, 2021
Owning your own trucking company provides you with freedom and the ability to work your own routes and schedule. Learn how to start a successful owner-operator business.
Trucking is a critical industry that keeps our economy moving - trucking is the lubrication that keeps our economic machine running. Almost every single good sold in our economy today has been on a truck at least one point in time.
According to the Bureau of Labor Statistics, the median pay for heavy-duty truck drivers is $47,130 per year ($22.66 per hour). There are about two million heavy and tractor-trailer drivers in the United States as of 2020. The BLS forecasts the demand for truck drivers will grow about 11% between 2020 and 2030 as the broader economy grows.
Many new drivers are concerned about job safety due to autonomous trucking. It is true that autonomous trucking is on the horizon, but it is unlikely that it will completely replace all drivers. You can read more about autonomous trucking trends here.
Trucking is much larger than the BLS figures stated above (those figures are for heavy-duty tractor-trailer drivers only). Trucking extends to light and medium-duty as well. Not all truck drivers operate long-haul heavy-duty tractor-trailers.
In 2021, the demand for truck drivers is high and rates are very good. Many owner-operators are making good profit in today's economy. Many industry participants state that freight rates are high because there is a driver shortage - so new drivers are in demand.
Source: DOT FMSCA
The trucking industry is a fragmented industry - this means that smaller operators represent a large percentage of the total industry. In fact, owner-operators represent about two-thirds of the total number of carriers.
Source: DOT FMSCA and Equipment Radar
Takeaway: Small owner-operators make up about two-thirds of the trucking industry.
According to Bob Costello, Chief Economist of the American Trucking Associations (ATA), trucks move roughly three-quarters of the nation’s freight by weight. Typically shipping by large container ships it the cheapest transportation mode, followed by railway, and finally trucks. Trucks are used more often because the vast majority of businesses and factories do not have railway stations or shipping ports right at their doors.
Freight typically ventures on a journey of multiple modes to get from its origin to its final destination (for instance, container ship to railroad to truck to factory). Generally speaking, the shorter the distance, the more it makes sense to transport by truck. The longer the distance, the more it makes sense to transport by ship or railroad.
Source: US Department of Transportation Bureau of Transportation Statistics
Takeaway: Trucking (yellow) is the primary method that goods are shipped in the United States. Trucking represents 80% of goods shipped under 100 miles, and 50% of goods shipped between 1,500 and 2,000 miles. Data are as of 2018.
The Bureau of Transportation Statistics (BTS) Transportation Services Index (TSI) measures the volume of freight transportation services moved monthly by the for-hire transportation sector in the United States. The index incorporates monthly data from multiple for-hire transportation carriers. The TSI is used by many economists and industry experts to monitor the overall demand for trucking.
Trucking demand is cyclical. This means that when the economy is good, demand for trucking is high. The opposite can be true, too - when the economy slumps, then demand for transportation services also drops.
Takeaway: Transportation Services Index follows the general path of GDP and the broader economy. It is cyclical and has ups and downs.
The cycle can be your friend and foe - and it is something that you as a trucking business have very little control over. The broader economy oscillates over time - it is good most of the time, but it has rough patches during recessions.
Typically freight rates follow the economic cycle. Rates tend to rise when the economy rises, and rates tend to fall when the economy is in recession. In order to run a successful trucking company that lasts long-term, you should be aware that recessions can and do happen. You should always think about your business "what if" cases and have a plan to adjust your trucking business and expenses for cyclical downturns.
Source: DAT Flatbed Rates
Takeaway: Freight rates have climbed over 25% in the past year as the economy rebounded. Data are through August 2021.
Every great business today started with an idea. Most businesses start small, and they grow if they have a good business plan and strategy. Jeff Bezos started Amazon in 1995 by shipping books from his home garage.
When you start a business, you need three basic items to become a successful company:
You should create a business plan before starting your trucking business in order to maximize your chances of success. A business plan is the same concept as a trucking route - you need some sort of idea of the path you need to take in order to get from Point A to Point B. The same concept applies to your trucking business - you need to create a business plan to take your business from Point A (an idea) to Point B (a successful owner-operator company).
When you create a business plan, it's important to be realistic and not overly optimistic. At the end of the day your business plan is used by you, your bank if you get a loan, and others that might lend or invest money. Overly optimistic assumptions can give you and others a false sense of confidence - it might feel and seem good at the moment, but you could pay a high price down the road later in terms of wasted time and money.
A business plan can be as short as one page or as long as dozens of pages. Your business plan is a blueprint of how you will make your business successful. Similar to how athletes train before a game or match, writing your business plan forces you to think about your business and get prepared.
Components of a business plan typically include:
All long-haul truck drivers must have a commercial driver’s license (CDL). Qualifications to get a CDL are determined state-by-state. Generally, requirements include passing a written test and a driving test. Some states will refuse CDLs to anyone who has had a CDL suspended by another state.
Drivers can add additional endorsements to their CDL for specialized types of vehicles. These can include transporting hazardous materials (HAZMAT) and other specialty loads. Getting additional endorsements requires passing additional knowledge tests and a background check.
Federal regulations require CDL drivers to maintain a clean driving record and pass a physical exam every two years. Drivers are also subject to random testing for drug or alcohol abuse. Truck drivers can have their CDL suspended if they are convicted of driving under the influence of alcohol or drugs or are convicted of a felony involving the use of a motor vehicle.
You will need to obtain your own DOT MC Authority Number by registering your business with Federal Motor Carrier Safety Administration (FMCSA). The DOT uses your MC Number (also known as "operating authority") to track your regulatory compliance and safety records. Your MC will also classify your trucking company and the cargo you can carry.
You must also complete the Motor Carrier Identification Report (MCS-150) and Safety Certification Application. FMCSA will review your application by posting it on the Federal Register for a "mandated dispute period" of 10 business days while seeking out any public comment that might rebut your request.
Register your company in the UCR after you have obtained your DOT and MC numbers. The UCR validates your active insurance coverage within every state your company operates.
The IRP plate issued by your trucking business' state enables you to operate in the entire United States and most Canadian provinces. The license plate requires you to pay annual fees to renew.
Trucks weighing over 55,000 pounds must pay the Federal Excise Highway Tax ("heavy highway vehicle use tax"). You should complete Tax Form 2290 annually with the IRS to settle your tax dues.
This rule permits your business to get one fuel license and requires you to file fuel use tax returns every quarter in your registered state. Learn more about IFTA here
Your business must register an updated BOC-3 Form with the FMCSA. This designates a process agent to obtain interstate operating authority.
Starting in 2017, the DOT requires trucking companies to use Electronic Logging Devices to ensure compliance with federal hours of service regulations. You should read more about ELD mandate.
There are two main buckets that you should consider when starting a trucking business - your start-up costs and your operating costs. You should create a spreadsheet or notebook to estimate both of these figures to help you get a better idea of how the numbers flow. When you make assumptions, it is prudent to be realistic and also add in some extra padding ("budget buffer") as a contingency for items that come up that are unexpected.
When you start your business, you will have several upfront costs required before you can start earning revenue. Trucking businesses can be started with between $10,000 and $30,000 of upfront capital. Start-up costs include:
Your truck will likely be your largest start-up expense. According to Owner-Operator Independent Drivers Association's (OOIDA) 2020 Owner-Operator Member Profile Survey, the average cost of a new truck is $140,000, and the cost for a used truck was $60,000. A new trailer costs about $60,000, and a used trailer costs about $30,000.
Currently, most truck manufacturers are experiencing supply chain constraints, which is curtailing new truck production. Lower new truck availability is increasing the overall cost for used trucks.
The good news is most banks and truck manufacturers offer financing. This means that you can buy a new or used truck for no money down or very little money down. Over time you can pay off your truck as your business generates income.
Most jobs will pay you a certain amount per mile you drive. You can calculate your revenue by multiplying your average rate per mile times the number of miles you plan on driving each week.
Trucking is a regulated industry - Hours of Service regulation limits the number of hours a driver can be on the road. HOS puts an effective cap on the maximum number of miles you can drive in a given time.
Your mileage will also depend on the area where you drive - typically, you are able to drive more miles in a given time if you drive mostly on highways. Traffic jams and speed limits will lower your total mileage.
You should also plan for deadhead mileage - this is the mileage that you have to drive and you do not get paid for it. For instance, if you drive a load 500 miles to a location from your home base and you do not have any other jobs to return home, you have to drive that 500 miles back without getting paid.
Deadhead miles are a real drag on trucking profitability (industry average is about 20% of total miles driven)- so you need to be aware of it and factor it in when you calculate job profitability. Higher rates routes may not actually be the best choice if you have to incur meaningful deadhead mileage as part of the job.
Operating costs are the normal day-to-day costs that are required to run your routes and generate income. Operating expenses include:
Fuel is the largest expense for most drivers. Some jobs include fuel, while others do not. Truck fuel efficiency also varies greatly - newer models tend to have better fuel efficiency than older trucks. Some trucks may get 3 miles per gallon, while others can get 7-8 miles per gallon. This difference is a factor of 2-3x, which has a meaningful difference on the bottom line. OOIDA's owner-operator survey stated that the average mileage is 6.2 miles per gallon.
Maintenance is also a real expense that you will incur. Typically as trucks age, the maintenance cost will increase. As a general rule of thumb, maintenance costs tend to increase at a faster rate after the truck is five years old. Some maintenance costs are covered under a factory warranty for a limited time or mileage threshold.
Often there can be a meaningful delay between the time you spend money to drive a route (while you have to pay for fuel, food, etc.) and the time you get paid for that route. The timing difference between your operating expenses and when you collect your revenue is often referred to as "working capital."
You should plan on having some extra cash to cover your working capital needs. This amount can vary. Many businesses target 1-2 months. The amount you will need depends on how quickly you get paid for your services, and the costs that you incur.
Keep in mind that not all customers may pay you. You should factor in an expectation that a certain percentage of your revenue will need to be written off ("bad debt expense"). The percentage varies by industry, but typically it is low or mid-single-digit percent. Larger and more established companies tend to pay their bills on time. Smaller and under-capitalized companies often are at higher risk of not paying.
According to OOIDA's 2020 Owner-Operator Survey, the gross revenue for an average owner-operator is $190,000 driving about 121,000 miles (of which 26,000 miles are deadhead miles - about 20%). Total expenses were $124,500, which leaves a net profit of $65,500.
Keep in mind that the owner-operator still has to pay taxes on the income. So the take-home pay can be lower than the net profit above. As a business owner, you will be able to write off the value of your new or used truck ("depreciation") over time to offset your taxable profit. This helps reduce your overall tax bill. See Section 179 deduction and bonus depreciation here.
We all know that earthquakes happen, but no one knows exactly when and where they will occur. The same principle applies to running a business - you should expect and anticipate business earthquakes will happen at unknown and unexpected times. These earthquakes could include a major accident, a personal injury where you have downtime, a major change in freight rates, a major change in fuel costs, etc.
You should build in some cushion in your budget, and keep some extra money for a rainy day. Also, make sure that you buy proper insurance to cover your business for issues. This will help your business survive an earthquake.
You will increase the probability that your business will survive long-term if you think ahead and have contingency plans for the unexpected. The freight market changes constantly, and it has ups and downs. During the industry downturns, many operators lose their trucks and livelihoods. Those operators who are able to survive the downturns are then in a position to benefit from the next upturn with higher freight rates because many drivers were forced out of the industry.
You should target having three to six months of operating expenses as a cushion. Also, speak with your insurance provider to make sure you are covered for a wide spectrum of issues. Make sure you understand what your insurance covers and what it does not.
Yes, getting started in the trucking business is possible with no money upfront. It's important to understand that even though you can start trucking with no money upfront, you still will need to have a source of money for your start-up costs and short-term operating expenses. Sources can include loans from family, friends, or a bank.
Often you can use financing to buy your truck (likely the largest upfront expense), or you can lease it. The truck dealership you work with will consider many factors before offering you financing or leasing - they will want to know your credit history and see a business plan.
You should always keep in mind that your business will need some extra capital for unforeseen expenses and normal operating expenses.
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