Business Financing for Transportation Companies
The transport industry is often called the backbone of our economy, and not without reason. 70% of all freight and 90% of all consumer products and food in Canada is shipped by truck. The Canadian trucking industry contributes $39 billion to the economy every year – and that doesn’t include other transport methods or logistics companies.
So transportation companies support almost every other business in the country. But who do transport companies go to when they need support? Where can they turn when they need financial help facing the many unique challenges in their industry? Here we’re going to answer that question, and discuss the specialized financial solutions available to those in the transport sector.
How Can Financing Help a Transportation Company?
First let’s consider why a transportation business might need financing. No business can survive without adequate funds, and those in trucking and logistics are no different. Financing can help in a broad range of ways, such as providing the cash necessary to:
- Maintain financial stability
- Expand, grow and innovate
- Adopt new technology
- Manage inventory
- Develop or maintain a competitive edge
But it’s not just big picture issues that financing is appropriate for. Funds released from business financing can pay for some very particular expenses, such as:
- Vehicle/equipment purchase/repair
- Vehicle maintenance
- Insurance
- Permits
- Licensing
- Payroll
- Fuel
- Inventory
- Property costs
It’s clear that financing can be crucial for both long-term success and short-term survival. But choosing the right financing for the right circumstances is just as crucial.
What Are The Types of Financing Available To Transportation Companies?
Fortunately, there are a number of financing options for Canadian transport companies, but it is up to each business to understand them and choose the most appropriate. Let’s look at each in detail:
Business Loans
A traditional business loan is the most obvious and common form of business financing, not just in the trucking and transport industry but across all sectors. Business loans are simple instruments; you borrow a lump sum of money, and repay it at regular intervals (usually monthly) over a set period of time (most often somewhere between three months and five years). They often have fees, and charge a rate of interest that can be either fixed or variable. They can be either secured against a business asset, or unsecured.
There are a few big advantages of business loans: they can be for large amounts of money, their repayment periods can be quite long, and the interest rates charged on them can be quite low. This makes them ideal for long-term borrowing of large amounts. However, getting a business loan is not a trivial task. Businesses need to have good credit, an operational history of at least a year, a solid business plan, assets to secure the loan against if pursuing a secured loan, and detailed financial statements proving that the business will be able to make all of its loan repayments. The application process is comprehensive, and it can take a few weeks for a business loan application to be processed and funds for approved loans to be released. In addition, funds released by a business loan must be used for the purposes outlined in the application, and there isn’t much flexibility when it comes to changing the terms of the loan once they have been agreed.
All of this means that business loans are the hardest to get and the most structured, but potentially the cheapest, form of business financing available in Canada. This makes them useful for large purchases, such as property, vehicles and equipment, but less relevant for ongoing costs such as payroll and licensing.
Business Lines of Credit
A business line of credit offers the flexibility that’s missing from a business loan. Here’s how it works: a business applies for a line of credit with a lender. That lender assesses the business (its history, revenues, assets and so on) and decides how much money they are comfortable lending to the business – known as its ‘credit limit’. Just like with a credit card, the business can then use as much or as little of the line of credit as they like, up to that credit limit. Funds can be withdrawn as and when they’re needed, and interest is only charged on what’s used. When balances are paid off, the available credit amount resets, and can be reused. Lines of credit can be either secured or unsecured, as with business loans.
So lines of credit are flexible, reusable, and the funds from them can be used for any purpose – there is no need to inform the lender of the intended use each time the line is accessed. But there are some downsides too: as with a business loan, there are qualification criteria for lines of credit that not every business will meet. This includes credit score requirements, a provable operational history of at least a year, financial documents, and proof of assets if the line is to be secured. They are – generally speaking – for lower amounts than traditional business loans, but they are open-ended, as they can be reused over and over again. The interest charged is higher than on a business loan, but lower than on some other types of financing – but only as long as you don’t let the interest build up. As with a credit card, deferred interest payments can quickly compound and become unaffordable with a line of credit.
All of this means that a business line of credit offers long-term flexibility, but to keep it affordable it is important that a business has the means to pay off what it uses fairly quickly. This makes them useful for unexpected costs, such as vehicle repair or emergency expenses, but less relevant for large, predictable costs or ongoing working capital.
Equipment Loans
Equipment loans are extremely common in the transport industry, and for good reason. The average cost of a new heavy-duty truck in Canada is over $220,000, and anyone operating a fleet knows that it’s not just the truck itself that needs paying for. All manner of other equipment may be necessary to operate a transport business smoothly. For this reason, there are a number of equipment financing options available, including loans, leases, and lease-to-own agreements. The right type of equipment financing for any given company will depend on its needs and budget, as all the options have their own advantages and disadvantages.
The benefits of equipment-dedicated financing as a whole though are consistent: it provides reliable, specialized funding for large one-off equipment expenses, and as the financing can often be secured against the equipment in question, it can also be comparatively affordable. But all equipment-dedicated financing has one big drawback: it is only for use on equipment. If you need funds for cash flow, payroll, licenses, bills or anything else related to your business, equipment financing won’t be suitable.
Merchant Cash Advances
The last mainstream type of financing available to transport companies is merchant cash advances. Merchant cash advances differ from all the other options in one major way: the cost of borrowing is set at the start of the agreement, and does not alter no matter how long it takes to pay back the funds.
Here’s how they work: a business approved for a merchant cash advance (or MCA) receives a lump sum, which it can use in any way it sees fit. The cost of the advance is agreed before funds are released; this cost is not an interest rate, but a ‘factor rate.’ For example, a factor rate may be 1.1, which means the cost to borrow each $1 is $0.10. So if you borrow $10,000, you repay a total of $11,000. Once the factor rate is set, it never changes.
Repayments are taken as a percentage of credit card sales; every time your business receives a credit card payment, a small amount (known as the ‘holdback’) is deducted and redirected to the lender. This happens until the entire amount – $11,000 in our example above – is repaid. If you receive a lot of credit card payments, you pay back the advance faster, and if business slows and you receive fewer payments, repayments slow. In this way, repayments on an MCA will adapt to match your incoming revenue. This is incredibly helpful for businesses that rely on sales, have seasonal fluctuations, or who want a lump sum that can be used without restriction.
Another benefit of MCAs is that they are easier to qualify and apply for than other forms of financing. They are not secured, so no assets are required. Credit score is usually not a factor, as instead lenders want to see demonstrable revenue to determine how likely a business is to be able to repay their advance. New businesses who don’t qualify for a traditional loan or line of credit can get an MCA. Applications are usually processed in one or two days, so access is fast and convenient. However, the amount you can borrow via an MCA is lower than with a loan, and the overall cost is usually higher. And they’re only relevant to businesses that receive customer payments by card.
All of this means MCAs are great for short-term and emergency needs, including cash flow, payroll and inventory, but are less appropriate for big expenses that’ll take a long time to pay off, like equipment or property.
If you’re interested in getting a cash advance for your business, talk to BizFund. We have over a decade of experience catering to small and medium-sized businesses for all their cash advance needs.
Summary of Most Common Business Financing Options
| Business Loan | Business Line of Credit | Equipment Financing | Merchant Cash Advance | |
| Receipt of funds | As a lump sum | As and when needed | Goes direct to equipment supplier | As a lump sum |
| Repayment period | 3 months – 5 years | Open-ended | 3 months – 7 years | Open-ended |
| Repayment flexibility | No | Yes | No | Yes |
| Cost | Interest on entire loan amount plus fees | Interest only on what’s used | Interest on entire loan amount | One set cost, no interest |
| Restrictions on use of funds | Must be used according to business plan | None | For equipment only | None |
| Secured or unsecured | Both | Both | Both | Unsecured only |
| Qualification criteria | Strict | Moderately strict | Moderate | Lenient |
| Speed | 1-3 weeks | 1-3 weeks | 3-7 days | 1-2 days |
Who Provides Business Financing to Canadian Transportation Companies?
As a $39.55 billion market, directly employing over 300,000 people, there is no shortage of lenders willing to assist transport companies with their financial needs. They fall into several categories:
- Banks
- Credit unions
- Online lenders
- Specialty financing providers
- Private lenders
Each type of lender has their own pros and cons, and not every lender will offer every type of business financing. For example, banks and credit unions typically offer the most competitive interest rates on traditional business loans, but they can’t help you with a merchant cash advance. Credit unions may take a week or two to process a loan application, while an online lender will probably be able to do it within a few days.
Choosing the right lender therefore comes down to a few key questions:
- What type of financing best suits your needs? You can decide this by considering:
- How much you need to borrow
- What you need funds for
- How quickly you need funds
- How and when you can repay the funds
- Which lenders offer your preferred type of financing?
- Which of the lenders that offer the type of financing you need do you qualify with?
- Of the remaining options, which lender offers the best deal? You can understand this by considering each lender’s:
- Cost to borrow
- Reputation and legitimacy
- Transparency of terms
- Past customer reviews
- Available customer services
The Canada Small Business Financing Program
There’s one last thing that transport companies in Canada need to know about: the Canada Small Business Financing Program, or CSBFP. This is a program offered by the federal government to Canadian businesses with gross annual revenues of less than $10 million, to help them access loans of up to $1 million. The loans themselves don’t come from the government; the program instead makes it easier for small businesses to get loans from regular financial institutions, by sharing the risk with them.
This program has helped a lot of transport companies across the country access financial products that they wouldn’t otherwise be able to, so if after reading the above you think a business loan is the right financial product for you, then the CSBFP might be able to help.