A huge challenge for many micro- and smaller trucking companies is getting cash flow to actually flow. There are many financial tools available to assist this process; one is a bank line of credit. But what exactly is it? How will it facilitate cash flow for a trucking operation?
A line of credit is an arrangement between a financial institution, usually a bank, and a customer that establishes a maximum loan balance that the bank will permit the borrower to maintain. The borrower can borrow (in increments) from the line of credit at any time as long as he/she doesn’t exceed the maximum amount of the loan. A line of credit is different than a standard loan because the borrower can withdraw money up to the limit of the credit line, pay down the balance, and then withdraw that money again and again as needed. You only pay interest on the outstanding balance, not on the limit of the line of credit. And just like a credit card, you’ll make regular payments to lower your balance due.
How does this work for a trucking company? Let’s say you operate three trucks and the combined monthly operational cost (fuel, driver advances, etc.) is $30,000, or $10,000 per truck per month. Many of your customers pay in 30 days or more, but you need to keep your trucks rolling while waiting for their checks to arrive.
So, you apply to your banker for a $60,000 line of credit (two months, or 60 days of operational funds). This guarantees that if a customer pays a week or two late, you still have the available cash to keep rolling and generating revenue. You tap into the $60,000 line of credit for necessary fuel and operational funds for your truckers. When the checks from your customers arrive, you use them to pay down the balance due on the line of credit first. Any remaining amounts from your customers’ payments get deposited into your general business checking account. The closer your line of credit balance is to zero at the end of each 28-day cycle, the lower the amount of interest due. Zero balance is the goal each month. Since your line of credit is intended for short-term cash needs, your banker will expect your balance to be paid down as your cash flow improves.
If you need to expand your building or buy new trucks, however, then apply for a term loan for that acquisition. A line of credit should not be used for capital purchases.
A line of credit can provide a business with much-needed cash reserves to meet daily expanses. Most banks require a business to have at least two profitable years before it can qualify for a line of credit. To find out if this will work for your trucking operation, go to the bank with which you have the longest relationship and where you have business checking accounts. Many times lines of credit for small amounts will not require collateral. On larger amounts, you may need collateral and a co-signer.
A bank line of credit can make your operation more efficient. And there’s comfort in knowing you have a reliable source of instant cash for your short-term needs.
Contact Tim Brady at 731-749-8567 or at www.timothybrady.com
