Getting a semi-truck loan will begin your financing journey. But managing your loan effectively determines whether you can pay off the loan and achieve success in the owner and operator’s business. Ultimately, managing semi-truck funding requires aggressive planning, such as maintaining accurate revenue forecasts and not having more debt than you can handle. It also means communicating with the lender if it becomes difficult to pay off your loan.
If you are unable to pay one or more, let’s take a look at the different ways and options for managing semi-truck loans.
Strategies for managing semi-truck loans
Try these strategies to keep your trucking business finances in good condition and ensure follow-throughs on loan repayments throughout the semester.
1. Please read the loan agreement
Before you obtain a semi-truck business loan, you need to understand all the terms and conditions of the loan agreement. If you do not understand the conditions set, ask the lender.
The general terms and conditions of the loan are as follows:
Conditions you should know
- acceleration
- Acceleration is the ability to immediately pay outstanding principal and interest if the lender defaults on a loan.
- Amortization
- The amortization schedule shows how repayments are structured across the loan. This schedule requires you to pay more interest at the start of the loan, but you can pay more to the principal over time. However, monthly loan repayments remain the same.
- Annual Rate (APR)
- APR is a percentage that reflects the annual cost of a loan, including fees such as origination fees. This is the most accurate explanation of the cost of a loan.
- collateral
- Collateral is an asset used to assist with a loan, proof that you can repay some or all of the loan. In the case of default, the lender seizes the collateral and sells it to pay off the obligation.
- Defaults
- The default is a condition that violates the loan agreement by not making a repayment. Lenders differ in what time they consider a loan by default, so if you missed your repayment, please read this section in detail to understand the exact process.
- Loan amount
- The loan amount is the total amount you owe to cover the cost of your semi-truck.
- Penalty fee
- The lender may charge a fine fee for events that are deemed a violation of the loan agreement. For example, they may charge late payments.
- Repayment period
- The repayment period is the length of time required to repay, such as 48 or 60 months. While there may be flexibility in choosing a repayment period, high-risk borrowers may only get shorter terms.
2. Monitor your budget
Your business budget is essentially an overview of your business’s cash flow, including all your revenue and expenses. Regularly updating and tracking your budget is important for managing semi-track finance, as it allows you to see how your loan repayments fit your budget. Your budget should reflect:
- Current revenue
- Projected revenue includes projecting what you expect
- Profit ratio, it deducts costs from your revenue
- One-time costs such as repairing a vehicle or purchasing new equipment
- Fixed costs remain the same for each payment
- Variable costs vary based on season or usage
In addition to creating detailed budgets for your business, you need to update your revenue forecasts regularly. Startups and single-member businesses can avoid budget updates each month. However, growing small businesses may need to modify their forecasts daily or weekly. Doing so will help businesses manage their cash flow and predict gaps that can bridge with additional funds.
3. Pay your bills on time
Paying on time for semi-truck finance helps build or maintain good credit and avoids expensive fees. You can set up automatic payments from your business checking account to ensure you don’t miss the due date.
If you miss a payment, you can expect the lender to report the event to the Credit Bureau. This is Dun & Bradstreet, Equifax, Experian for business credits. If you sign a personal guarantee for the loan, your personal credit may also be hit. The lender will also charge late fees that you have to pay to get your account back in good condition.
4. Minimize debt
Too much debt can make managing business finance difficult as it keeps costs high and reduces profitability. Multiple loans increase the risk of defaulting one or more of your obligations if your revenues drop unexpectedly.
If you are in an emergency and need additional cash, you can calculate the debt service coverage rate to know how you can handle your new debt. DCSR measures the amount of revenue required to cover all your obligations. Lenders like to see DCSRs above 1.25. In addition to using DSCR, calculate your expected monthly payments and see if your repayments fit your budget.
On the positive side, you can also maintain minimal debt by making additional payments when sales are higher than expected. You will ultimately pay off your loan early, save interest and increase your working capital.
5. Save business emergency funds
You should also consider the seasonality of your trucking business contract and build a funding reserve to pay your bills in the late season. As a rule of thumb, you may want to save 3-6 months of money to save on a healthy business.
This reserve helps to exacerbate the ups and downs of the business market, allowing you to continue your business even if revenues drop temporarily. If you set aside money in your interest account, you can avoid taking on more debts if you run into unexpected expenses, such as repairing a semi-truck.
6. Perform scheduled preventive maintenance
As an owner operator, you are responsible for performing regular preventive maintenance on your semi-truck. We want to keep it tailored to the road, so that we don’t lose work for repairs and maintain the value of this business asset.
There are several levels of maintenance checks that need to be scheduled, including:
- Dry preventive maintenance. This type of maintenance, also known as the PM-A, includes refilling fluid and tire pressures and inspection of key truck components such as tires, suspension and brakes.
- Wet preventive maintenance. This type of maintenance includes everything from anti-dry maintenance and includes oil and filter changes.
- Dot inspection. All commercial vehicles require an annual Transport Bureau inspection. This includes a detailed inspection of the track components. Dot inspection checks brakes, fuel system, lights, reflectors, steering, suspension, tires, rims, turn signals, and more.
6. Create a credit
You’ve already got semi-truck funding, but continue building your business credits in case you need a future loan. You can build business credits by paying semi-truck loans on time and using a credit line or business credit card to establish trade credits with the vendor you use.
The factors that are considered in your business credit score include:
- Credit usage
- New Credits
- Payment history
- Business size
- Business time
- Types of credits
What happens if I don’t pay a semi-truck loan?
If you do not pay your loan, you will violate the terms of your loan agreement. This will negatively affect your business credit and will likely be your ability to get a loan in the future. The good news is that if you are experiencing difficulties, you are not without options.
1. The loan will be delinquent
If you miss a single repayment with a semi-truck loan, the loan will be in arrears. The lender will notify you of missed payments and charge you late fees.
At this point, your lender won’t chase you to make up for the amount you missed until you missed a significant number of repayments, such as 3-6 months’ worth. But your credit score will hit. By earning missed repayments and late fees, you can easily restore your loan to good condition.
2. You can choose to pay debt relief
If you know you won’t be able to make the missed repayment in the near future, you should contact your lender to let them know what’s going on. Don’t avoid calls from lenders or debt collectors. Many lenders are willing to proceed with debt relief plans to keep their loans in good condition.
Debt relief includes:
| option | How it works |
|---|---|
| Deferred payments | Your lender can suspend repayments for more than a month to return to your feet. The lender should make up for the missed repayment by adding additional repayments to the end of the loan or by starting the repayment again. |
| Modified loan terms | Lenders change their loans, extend their repayment terms and reduce monthly repayments. |
| Refinance | Your lender may be willing to refinance a semi-truck loan. This will reduce your repayments and how long you can extend your loan to pay off. |
| settlement | You will work with your lender to pay off your debts at an amount lower than your current outstanding balance on your loan. Your credits will be greatly affected. |
3. declared by default and entered into the collection
After missing multiple repayments, the lender declares a business loan by default and attempts to collect the outstanding balance. The entire loan amount is due due as you breach the terms of the contract. Most semi-truck loans use trucks as collateral, so the lender will likely take your truck and get the loan back.
Lenders can also chase after other business assets. This allows you to close your business if you need to use all your assets to satisfy your lender. The lender may also seize personal assets if he provides personal guarantees for the loan. Personal guarantee means you agree to be personally liable for repayment of your loan.
You can avoid the default by contacting the lender and explaining the situation. Your lender may be willing to work with you to help you pay off your loan successfully.
Conclusion
Effective management of semi-truck loans involves future preparation and taking a proactive approach to business finance and credit tracking. The best scenario is to pay back all your loan repayments on time or early, and build a solid business credit history that could potentially be advantageous to you later.
However, if difficulties arise, you should make decisions to help you manage your business loans, such as using cash reserves, reducing expenses, or contacting lenders about financial difficulties.
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