Question: My father is planning on retiring and he wants me to help him grow his dump truck business. I understand the business model, but I can’t figure out how to cover the costs of adding more trucks to the company. Every time we add an extra truck to the fleet there are expenses, but the broker that pays us holds up funds for 75 days. How can I manage this finance problem so I can add new trucks?
Answer: Sounds like you need to do two things: Ditch your broker and reduce the expense of adding trucks to your fleet, perhaps by leasing them or getting financing through your bank.
First, think hard about whether it’s the best time to expand. Business successions tend to be tricky, especially when a founder is retiring and a younger family member takes over. You may want to consider waiting until you successfully get through the transition period and are comfortable running the company before you attempt to expand it.
A further caveat: Before you think about whether to lease or buy new dump trucks, run some numbers to make sure they’ll bring in enough new business to justify the investment. Are there plenty of local or regional contracts you could win if you had new trucks? Would they generate enough revenue to not only pay for their operating costs, such as fuel and labor, but also cover the lease or loan payments? After that, would they bring in enough profit so that you can set aside money to replace them when they wear out in five or 10 years? “Too many small business owners forget that they need to recover their investments, including needed replacements, when they count up their profits,” says Roger Grabowski, managing director of valuation services at financial advisers Duff & Phelps.
If you’re persuaded that there’s a realistic opportunity to expand and this is the right time to do it, you can buy the trucks with your own money or investors’ money; lease them and structure the payments so they fit your cash flow projections; or purchase them using equipment or vehicle financing from a bank.
David R. Mitchell, managing director of Transportation Resource Partners, a private-equity firm specializing in transportation and logistics companies, says leasing the trucks may make the most sense. “There are likely a number of potential leasing companies that could finance the vehicles,” he wrote in an e-mail. In a small business, taking out a loan could require a personal guarantee and add burdensome financial covenants, while new investors would dilute ownership, he says.
Geoffrey Greenwade, president and chief executive officer of Green Bank, a Houston community bank that primarily serves independent business owners, says it would be worth your time to at least talk to a couple of local bankers, explain your situation, and ask what they can do to help. “Most banks will finance term-equipment purchases and real estate,” he says, and family-owned businesses are the “best customers in community banking.”
Your larger difficulty stems from the long lag time between completing a job and being paid for it by your broker. It’s a common problem for small owner-operators in the construction industry, who typically get work through brokerages that act as developers’ middlemen, procuring what may be dozens of pieces of equipment at various stages of demolition and construction, says Joe Rajkovacz, director of governmental affairs for the California Construction Trucking Organization, a trade organization.
“The length of time it takes to pay can be pegged to how unscrupulous the broker is, unfortunately. The best ones pay in 30 days. Anybody pushing terms to 70 or 80 days is somebody who’s pocketing money. There’s a lot of chicanery that goes on in transportation brokerage,” Rajkovacz says. “There’s a lot of scumbags out there who need to be regulated out of the business.”
Of course, dumping your current broker and working with another one may be easier said than done, particularly if your broker dominates the business in your region and brokers who pay faster don’t have enough work to keep you busy full-time.
Even if you can’t drop your late-paying broker entirely, think about branching out and doing some jobs for others, Rajkovacz suggests. As they begin funneling more contracts your way, you may be able to gradually stop working for the company that’s holding up your payments. Make sure you negotiate better terms with the new brokers you contact. “The [Small Business Administration] holds negotiating classes all the time, so if your skills are wanting in that area—like many small business owners’ are—you should think about taking them,” he suggests.