B.S. and Bullseyes

Trucks are enchanting things. The size, the shine, all those options-you could spend countless hours working out specs for that truck you’re planning to buy, cycling through combinations like a Rubik’s Cube. But you’ve heard the line a hundred times and you’ve vowed to heed it: weigh what you want versus what you need. Be prudent. It’s not easy to make a buck as an owner-operator, after all. There’s a glut of good used equipment and low down payments on new rigs available. It’s a truck buyers’ market. Don’t let the salesman up-sell you to something you don’t need and can’t afford anyway, you tell yourself.

But after you’ve been on the lot and then across the desk from the salesman, all that high-buffed shine and sweet talk can blind you to the reality that a truck costs more than just the price you negotiate.

“It’s pretty hard to hold onto the reigns of these guys. There’s a lot of emotion involved. They just want to grab the keys and go,” says Chris Bennett of Transportation Financial Services (TFS) Group, a Waterloo, Ont.-based consulting firm that specializes in accounting and business advice for owner-operators and small fleets. For all the time spent evaluating their own needs and working with a salesman to develop the optimal spec, not enough owner-operators shop for financing.

“If they get all their needs satisfied by the dealer, most owner-operators are taking advantage of that and are happy with what the dealer can provide,” says Bob Pielsticker, lead partner of the transportation services practice at KPMG, a management consulting firm. That’s a mistake, he says. Because unlike buying or leasing a car, financing a truck is a complex business. It makes sense to seek out professional guidance-or at least do some homework.

Besides in-house financing entities, chartered banks, trust companies, credit unions, third-party financial firms, and even family and friends should be considered for funding. But not before you’ve taken a hard look at what you can afford now-and throughout the life of your loan. Bruce Usselman, sales manager for Volvo Commercial Finance Canada, says 75% of his company’s business is with first-time owner/operators-some with as little as eight months experience in trucking.

“A lot of guys don’t know how to manage their bills,” he says. “They’re OK for the first 18 months and then they get into major repairs. Others want to expand in six months and get a new truck. This is too fast,” he warns.

Dave Brown of Mercedes-Benz Credit Corp., a financing group of Freightliner LLC, points out that a consistent weakness with fleet drivers who become owner-operators is unrealistic earnings expectations.

“The drivers look at it like a job, which it isn’t,” he says. “They know how to drive a truck and what’s involved with the industry, but the one big issue that faces them is how to manage their money when they have to do it themselves.” That’s why it’s imperative to draw up your business plan with help from an advisor, Brown adds.

A strong business plan based on realistic expectations of what your operation will entail and earn can indeed put you in a positive light with lenders. More to the point, however, it will help you to focus on your financial goals-not just your desire to sit at the wheel of your own truck. That means putting as much effort into your financing package as you would your truck spec.

The worst thing you can do is to waltz into a dealership, select a truck, and tell the sales rep what you can afford each month, says TFS Group vice-president Steve Mulligan. Knowledge is leverage, he says. If you can negotiate just one point of interest off a $100,000, five-year loan, you could save nearly $3000.

What should you look for when you’re looking for a financing package? Mulligan and others offer these tips.

1) Treat the truck and the financing as separate deals.

The best route to favorable financing is to shop for the best truck price, then work on the interest rate, terms, and monthly payment. You should get detailed finance quotes in writing from dealers, and scout other equipment finance firms and your bank. Then have an accountant review them and get the pros and cons of the different deals.

And you ought to be suspicious of anyone who is apprehensive in quoting interest rates on loans or leases.

2) Watch out for so-called incidental fees.

Keep your eye open for unnecessary administration or processing fees added to the truck price. These could pop up on the bill of sale or invoice and have innocent names like “filing fees” or “miscellaneous” charges, Bennett says. With what trucks cost these days, you should negotiate to either reduce or eliminate them. If you feel you’re talking to a brick wall, offer to take your business to someone else. Don’t think you can always get a good deal with “one-stop shopping.” There are lots of dealers and trucks in the sea.

3) Look for value-now and years down the road.

Be careful that what you owe at the end of your contract’s term is not more that the truck’s fair market value. This is known as being “upside down” when it’s time to trade the truck in. It’s impossible to see what the truck market will look like down the road, but the faster you can pay for your truck, the better. You can help to avoid being upside down by picking smaller residuals and shorter amortization periods.

4) Do you need all that insurance?

Beware of credit life and disability insurance bundled into your deal. Many drivers pay far too much. Mulligan says this is one of the biggest complaints clients bring to TFS, citing a husband and wife team that had $28,000 added to their contract as an example. In some cases you may be better to purchase term insurance instead of credit life insurance. Whatever the case, have your accountant take a look.

Also, depending on the lender, insurance requirements vary but most insist on a $5000 maximum deductible and a minimum $1 million liability. Ask your insurance agent about deductible buy-down insurance if you do not have the proper coverage.

5) Beware the tax implications.

If you are registered for the Goods and Services Tax (GST) or Harmonized Sales Tax (HST) you must charge it and remit it to the government when you trade your current truck for a new one.

When you get your GST refund back from your new purchase, it may make sense to apply it to your payment schedule as a “balloon” payment, as it would lower your financing costs. If you travel out of your home province or out of the country on a regular basis, you may qualify for a refund of provincial sales tax (PST) paid on your truck: If 75% of your travel is to the U.S., you get 75% of the PST back. Even if you’ve bought a truck already, it’s retroactive for the past four years.

6) Don’t base all your moves on the monthly payment.

It’s the total cost of financing that should propel your decisions. If your agreement is a lease, keep in mind the taxes you’ll have to pay on each payment.

There’s also a big difference between capital leases and operating leases. With an operating lease the full payments are tax-deductible. But Revenue Canada treats a capital lease the same as a loan: you can only deduct interest and the Capital Cost Allowance. And given the same rates and terms, the cost to a buyer is about the same with a loan or a capital lease.

Many leases, even those referred to as “open-ended,” have what is called a “fixed” option to purchase. That means you can’t just walk away at the term’s end. If the guaranteed purchase option is $80,000 and the dealer flips it for only $70,000, you must pony up the difference.

7) Payout penalties? Check the fine print.

When reading the fine print, watch for early payout penalties. Banks and finance companies handle this differently: an open loan or line of credit at a bank would carry none.

Many equipment finance firms charge 5% of the outstanding principal but waive it if you refinance your next truck with them.

What’s quite common in leasing is being forced to pay the outstanding balance including all the remaining interest on the loan up front – an unpleasant experience.

Compare late-payment fines as well. Some lenders are more forgiving than others.

8) Take time to understand what you’re signing.

If you are thinking about buying a truck and leasing it to another driver, read your contract carefully as many finance companies don’t allow this.

If you’re a sole proprietor and sign a sales agreement, that piece of paper is a personal guarantee that you’ll pay the lender back.

If your business is incorporated, you’ll be asked to sign either a continuing or specific guarantee to be approved for a loan or lease. A specific guarantee deals with only the equipment you’re buying and a continuing one adds all subsequent purchases or leases made with the finance company into the equation. In both cases the equipment serves as collateral. Often a bank will use a general security agreement, which holds all of your personal property as collateral. Yet another type is known as a cross-collateral guarantee: if you have a few loans or leases under one roof and default on one, the firm can hold your other equipment as collateral.

9) Double-check the math. Finally, once you have decided on a contract and signed on the dotted line, they should double-check the math.

As Bennett and Mulligan slide a copy of one of their client’s contracts across the table, it becomes apparent that even the biggest finance companies can make mistakes: incorrect interest rates when the amount is amortized, improper GST payment allocation, and a $6000 overcharge.

And this on a standard contract. When shopping for that next truck, it’s clear you had better fasten your seat belts.