How To Become An Owner Operator – Part 1
Many company drivers are dreaming of having their own truck and drive for themselves. After all America is the land of opportunity and good trucking service is always in demand, so there is money to be made by working for oneself. Most of the drivers that fail in owning a truck, do that because they are not prepared for all that will come towards them. I have seen very good drivers losing their savings and owing money because they were surprised with some of the expenses that come with buying and operating a truck. I wrote that, so future owner operators read it now, instead of paying the high price of learning it down the road.
1. First things first – you need a truck. There are two ways – you can buy or lease a truck.
• Buying a truck is easy. Walk in the first truck dealer you see and the salesman will do everything possible to sell you one and help you finance it, if you have any credit history. You should consider how much the monthly payment will be for that truck. A long time ago a friend of mine told me that a truck without a monthly payment does not exist. If you buy a brand-new truck you will have the obvious loan payment, then immediately after you pay it off, there will be a new payment in the form of higher maintenance expenses.
• Leasing a truck – you can lease a truck from Penske/Ryder, as well as most of the big dealers like Freightliner, Volvo, Peterbilt/Kenworth and International, or even most of the truck financing companies. The first two companies would charge certain amount per month + charge per mile. They will cover most of the maintenance, however, they will not cover damages due to driver’s fault, which includes anything from a flat tire due to nail, cracked windshield or even if someone cracks your mirror at the truck stop and runs away, etc.
The other type of lease is called “Lease to buy” by lenders. It works similarly to a loan, but the truck is owned by the bank until you “pay it off”. Essentially, you are paying rent (lease payment) to the bank, which in the end transfers/sells it to you for $1. The sales pitch for such loans is that you can write off the payments as expense and pay less taxes. If that is the only reason to choose it – don’t. It is true that a lease payment of $2000 a month can be written off at the end of the year and a loan payment of $2000 cannot in the same way. However, when you have a lease payment the maximum that you can write off (in the case with the $2000 a month) is $24000, compared to the loan type, where you can write off not only the whole interest, but also you can deduct depreciation expenses.
Next time when you have to talk with a loan officer for financing a trailer for example, they will look at your financials or tax returns. It is much better to have depreciation expense than lease expense, if you want to get a better loan rate.
A few things that the financing agency will ask you are – how much experience you have as a truck driver, how much (if any) experience you have as an owner operator and for which company you will be driving for. The first question is so they determine whether you can drive a truck. The second is to determine if you can operate a business, and the third one is for them to know that you will be doing actual work with the truck.
After all the paperwork is done and you are ready to drive off the parking lot, you must show the dealer and the lender proof of insurance.
2. Registration and insurance.
To haul any type of load on public highways, you need to have a truck registration. This is the next very expensive part of owning a truck. The registration can be a state registration or IRP (International Registration Plan). The first would give you permission to drive only in the state where the truck is registered. It is usually more expensive than the other, but you don’t need to pay IFTA (International Fuel Tax Agreement). The second gives you permission to haul freight in North America (hence International Registration Plan) with the exception of the Mexican and Canadian provinces that don’t border with the US.
For different insurance types, you can read more here.
3. Pick up the right freight segment
There are four main freight types and everything else we will put in the group of Other Freight.
a. Dry Freight – this is the most common freight out there and the easiest to haul. Most of the TL carriers include this type of service in their business model. Dry Vans are the cheapest trailer to buy, maintain and load. Most of the time you spend on the road. Almost all companies that pay per mile pull exclusively dry vans. However, they are the cheapest type of loads compared to other types for the given lane.
b. Refrigerated or temperature controlled – for this type of freight you need a reefer trailer. It costs twice as much as a dry van trailer and you need to maintain the reefer unit. It is like having another car attached to the trailer all the time. Oil changes, belts, AC compressor etc., are things that you need to be aware and concerned about. Majority of the loads are foods, which means long pickups, deliveries and unusual appointment hours. Reefer is easy to load like dry van, but you must sleep with the unit on most nights. Some drivers are ok with it, others hate it. You make more money with the reefer loads, but you also have more expenses.
c. Flatbed loads – these loaded with a crane or forklift from the side of the trailer. The most commonly used trailers are Flat Beds (obviously), Step Decks and Conestoga. Flatbeds are almost the same price as dry vans, where step decks and Conestoga are around 10k more expensive. However, you must buy more supporting equipment for them – chains, straps, tarps, just to name few. You must also use the equipment, when you are getting loaded. Chains are heavy and you should move them around when you are securing steel coils. Tarping is not fun for many drivers as well. However, you are getting paid better for the loads.
d. Hazmat – the 3 previous load types can be Hazmat as well. That means that they need to follow the Hazardous Material Transportation Regulations. Most of the time this type of freight is loaded in dry van and reefers, but occasionally you will see a flatbed with such freight. It pays more than other freight for the given lane, but you must be more careful.
e. Other Freight – these include tankers, auto carriers, livestock trailers, dump trailer etc. This is a highly specialized freight for which you will know, if you have worked as a driver for one of the companies that transports it. People usually do not come from driving school and start hauling Livestock or Tankers. They come with their specifications. Livestock is handled different than oversize load or a car hauling trailer.
4. Choose the right trucking company for you!
This is the hard part. How do you decide which trucking companies are good and which one are bad?!
Trucking companies pay their owner operators in a couple different ways:
a. Pay per mile – most of the big trucking companies pay per mile to owner operators. They usually have a base rate per mile + fuel surcharge(fsc) and you don’t have to have a trailer in general. Signing with such company relieves you from the burden of thinking about other charges that you will have – liability insurance, trailer rent, permits, trailer maintenance etc. The fuel surcharge changes with the average price of fuel in the US, so it is the same for everyone. However, the base rate changes with the different companies. Some will pay you one rate for loaded miles and another (lower and often without fsc) for empty miles. Other will pay seemingly higher rate for all miles, but you must pay for IFTA, KY permit, NM permit etc. And in general, these companies will have stricter rules for you to obey. Good examples for such companies are FedEx, UPS, XPO and Amazon.
b. Pay percentage of the freight – this type of trucking companies pays the owner operator percentage of the freight that they book for the truck. Usually the FCS is included in the gross rate. Smaller companies pay 86-90% of the freight revenue, where Landstar (the biggest owner operator company) and most of the other big companies (when they pay percentage) pay you around 70%.
The companies that pay around 86-90% will not cover any of your expenses related to permits, insurance, trailer etc. However, you have the most freedom being owner operator with them. Some drivers misinterpreted that freedom with changing their company once a month. Yes, you can do that, but it is a bad idea in the long run. When companies do a background check (as required by DOT), they see that and will not take you seriously because they will know that you will work only for a limited time. There are bad companies out there (Chicago has a bad reputation), but if you must change 3 in 6 months think about the way you choose them or the way you work. Maybe the problem is with you.
You will be charged usually $700-1000 for “cargo” insurance which is liability and cargo insurance in one. On top of that you will have the option to choose to be charged an additional 5% from your revenue or $500-800 a month for trailer rent, insurance and brake/tires wear. The new owner operator can purchase its own trailer, which will save him a couple dollars a month. An additional charge would be for IFTA and state permits. We have seen drivers that take money from IFTA, but for the most part it is around $100-200 per quarter. State permits depend on how much you drive through OR, KY, NM and NY. Oregon charges you $0.1638 per mile driven in the state. You can offset the extra charge by fueling there, since fuel is cheap. NM, NY and KY charge around $0.05 per mile driven in the state. Other states don’t have such charges, but they do have toll roads, so one way or another you pay.
These charges should be in the back of your mind when you pick a load, but should not be your main criteria.
Part 2 will include different strategies of picking up loads, working habits and maintaining the equipment.