A Resurgence in Trucking Investments Presents Opportunities for Shippers
Economic indicators and data reports suggest the economy is strengthening, which should continue to promote business confidence through the remainder of 2017.
The second quarter 2017 U.S. GDP report indicated that expenditures grew by 3.3 percent, led by an 8.9-percent gain in durable goods spending. With increasing expenditures for durable and non-durable goods, manufacturers, retailers, and distributors will use trucking fleets more frequently to meet "fast and free" shipping demands. In fact, according to a study from the Freight Transportation Research Associates, active truck utilization will peak in early 2018 due to strong freight demand.
A company's fleet expansion plans are dependent upon current fleet utilization rates, business growth from new and existing customers, and positive economic conditions. Companies with lower utilization rates have capacity to handle new business without adding to their fleet. In contrast, companies with high utilization rates and the opportunity for sustainable growth may consider adding to their existing fleet.
In light of a strengthening economy, business owners, controllers, and chief financial officers (CFOs) at companies in need of shipping solutions should evaluate their fleet needs and understand their equipment and financing options.
Equipment Financing Options
Equipment financing is important for companies looking to make new investments or replace older models. It allows for the acquisition of new assets and the ability to spread the cost over a period which generally coincides with revenue cash flows from the equipment.
Equipment finance also helps companies facilitate the acquisition of their equipment through various products. Here's a high-level overview of various options and their benefits:
1. Tax Oriented Leases – The company, "the lessor" claims the tax benefits of ownership through depreciation deductions, but passes through to the lessee those benefits in the form of reduced rentals. Examples include:
- TRAC Lease – Combines all the advantages of leasing while retaining the ability to purchase the equipment at the end of the lease term at a pre-determined residual amount that is agreed upon when the lease begins.
- Fair Market Value Lease – A common form of a lease used with broader options at lease maturity to buy, return, or re-rent the equipment.
2. Finance Lease – A fully amortizing, fixed-rate lease with a nominal purchase option at lease maturity. Lessee retains the benefit of equipment ownership (depreciation).
3. Term Loans – Typically, a loan is the most popular equipment financing choice for those who can use the depreciation benefit. Term loans can be offered on a fixed rate or floating rate basis.
4. Seasonal Payments - A strong financial partner will understand seasonal demands and can offer higher payments for peak season and lower payments for slower seasons.
Selecting a Financial Partner
When selecting a financial partner, it is important to find one that has deep industry experience combined with a strong balance sheet to handle ongoing needs through every cycle. Any financial institution can provide a basic loan to finance the acquisition of trucking equipment, but a financing partner with experience in this sector will have a better understanding and insight into market trends and issues affecting the industry.
A financial partner with knowledge of the economic life of trucking assets and an understanding of the mileage activity of a company’s fleet can be more prescriptive when recommending a financing product and its structure.
CFOs will receive the best financing solution from their financial partner when they explain the entire financial picture of the company – where they are today and more appropriately where they’re going.