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Towing Company Loans

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The Best Business Loans for Towing Companies

The tow truck industry provides needed services for towns and cities, individuals, and businesses. Whether your business removes illegally-parked vehicles, rescues a stranded driver, or hauls away fallen trees, to operate successfully you need functioning, well-maintained equipment and a fleet large enough to meet demand.

For small business owners thinking of investing in or expanding a tow truck business, there’s good news. Annual growth has averaged around 7-8% a year for several years, and market size is estimated between $7 to $8 billion. The average tow truck company has $0.7 million in annual sales, as the industry is dominated by smaller, private companies with an average of eight employees. The lack of concentrated, national players makes it easier for smaller companies to break in.

But breaking into the industry or expanding often requires significant capital. Most small business owners fund their plans through a combination of savings and borrowing, or from borrowed funds.  Here are many common reasons to borrow, questions to ask yourself before borrowing, and the best business loans for tow truck company owners.

Reasons for a Tow Truck Company to Borrow

Whether you’ve just launched your business or have years of cash reserves, it’s not uncommon for small business owners to seek outside capital sources. Even if you could fund an expansion from savings, for example, taking out a loan allows you to preserve capital for emergencies. Here are NUMBER common reasons that tow truck companies might need to borrow.

Cover payroll and employee-related costs

The tow truck industry depends on recurring business, which in turn depends on great customer service. Whether you service customers directly, have a contract with a city or business, or subcontract for AAA, maintaining high customer service levels keeps your business profitable. If you’re dealing with high turnover or losing employees, it will impact your business.

Smart business owners know that if they fail to make payroll, or provide training and other opportunities for their employees, they could lose important team members. Attracting and retaining talent requires paying them well and on time. But even the savviest budgeter can run into cash flow issues. 

If your business is going through a slow or difficult time, or you’re waiting for customers to pay invoices, you may need to take out a working capital loan to cover payroll. 

Expand your business 

When you’re turning a profit and you see an opportunity, it might be time to expand. At some point, many successful business owners must decide if they want to remain at their current size or continue to pursue growth. However, setting aside enough capital to fund an expansion while also covering daily operating costs can be a challenge. 

A large business loan gives you the capital to expand but still meet working capital needs. Your business’ cash flows only have to cover the loan payment until you’ve completed the project, instead of paying all those costs up front.

Equipment purchase, rental, or storage 

Part of an expansion plan could include purchasing or renting more tow trucks. Or, your existing equipment could have reached the end of their useful lives. Purchasing snow plows to attach to trucks could be one method to expand.

Whether you rent or buy your equipment, you’ll also need a lot large enough to park your trucks. Tow truck company owners could take out equipment financing loans for new trucks, a loan to pay a landlord’s security deposit, or a large business loan to purchase land. 

Investing in technology

Computer-assisted booking keeps customers satisfied and can reduce labor costs. Route-planning software can increase efficiency and cut costs. Technology has changed every aspect of life in America, and the towing industry is no exception. 

An investment in a technology based system could involve a significant upfront cost, with savings realized over time. Improvements in technology could support an expansion without adding new equipment, and keep your employees busier. Because it’s worth it in the long run, many small business owners borrow the funds to invest in new software.

Pay insurance premiums

Most tow truck companies carry a high level of insurance coverage, with its associated high premiums. Typically, they’re required to carry:

  • General insurance
  • Risk insurance
  • Health insurance
  • Worker’s compensation
  • Overhead expense disability insurance
  • Payment protection insurance
  • Business owner’s policy group insurance
  • Liability insurance

When you carry multiple policies, one could come up for renewal at a poor time for your business’s cash flows. But letting a policy expire isn’t an option, particularly if your customers require that you carry minimum coverage levels. If a policy renewal comes due and you don’t have the cash on hand to pay it, consider a short-term loan. 

Questions to Ask Before Borrowing

Before you apply for a small business loan to support your tow truck business, ask yourself these questions. The answers will direct you to the right lender to meet your needs and ensure borrowing success.

  • How long have you been in business? 

How long has it been since you started operations? Traditional banks typically only work with borrowers who can show two or more years of successful operations. Businesses who have been open less time will find it difficult to work with a bank. If you only launched your two truck business door two months ago, an alternative lender will be a better source of capital.

  • How do you plan on using the capital?

If you’re funding a large expansion – purchasing many trucks, buying or leasing land to store, and investing in software – you’ll need to borrow more and likely need a longer repayment term. Taking out a short-term loan could lead to a cycle of continually borrowing to complete the project. Applying for one long-term small business loan meant to fund the entire project avoids having to go back to lenders for additional financing (which can cost you more in terms of application fees). On the other hand, if you only need to cover rent for a month or two a working capital loan could be the best fit. Knowing how you plan to use the capital will direct you towards the best loan product.

  • Do you have good credit?

Taking on debt in the past – to open your company or get through lean times – may have hurt your credit score. Traditional lenders rarely work with small business owners who have scores less than 700. If this is you, approach alternative lenders accustomed to working with borrowers who have scores down to 500. 

  • What can you afford to borrow? 

When you borrow, you want to avoid overextending your business. Loan payments that make it difficult to meet existing financial obligations will harm your business. Budget carefully before taking out a loan and determine how the monthly payment will impact your cash flows. Scale back your plans if the payment could put your core business in jeopardy.

  • Will the project generate a profit? 

Are you competing for a new town contract? If you have a specific project in mind, run cash flow projections to determine if it will generate a profit. The projected rate of return for any expansion or project should always be higher than the cost of capital. It doesn’t make sense to pay more for money that you’ll make when using it.

Best Small Business Loans for Tow Truck Companies

Lenders offer several types of loan products, each intended to meet a different business need. After reviewing these products, one will likely stand out to you as the best match for your business’ circumstances.

Working Capital Loans

Working capital is the money you need to pay daily expenses like rent, payroll, and utilities. Working capital loans have a shorter term because they’re primarily intended to help business owners who face temporary cash flow issues. It takes as little as 24 hours to apply for and receive funding for a working capital loan. 

To qualify for a working capital loan, you must have a credit score above 650 and your business must generate minimum monthly revenues of $10,000. Lenders extend working capital loans between $10,000 to $1 million. If you face a temporary cash flow crunch or need emergency funds, consider a working capital loan. 

Equipment Financing Loans

Equipment financing loans fund the purchase of a specific piece of machinery, such as a tow truck. Equipment financing lenders will only extend enough credit to cover the purchase price, though sometimes they’ll roll shipping and delivery costs into the loan. 

The equipment serves as the loan’s collateral, so you’ll pay a lower interest rate than on an unsecured loan, but the lender may want it appraised.  If your credit score is less than 700, they could also require a personal guarantee. Borrowers with excellent credit might be able to borrow up to 100% of the equipment’s price. Used equipment must be less than 10 years old. Typically, you can borrow up to $150,000, though small business owners with a strong credit profile could borrow up to $250,000. 

New tow truck businesses who have been open less than one year can only borrow up to $25,000. When you reach two years in business you can borrow up to $35,000. Even with a lower credit score, it’s easier to qualify since the lender could repossess the machinery to recoup losses if you default. 

Large Business Loan

A large business loan funds larger projects – such as purchasing a lot to park and store equipment. With a large business loan, you can borrow between $50,000 to $2 million. The loan will have a longer repayment period of up to three years.

With a longer repayment term, you’ll have lower payments. This makes it easier to manage cash flow during the project’s launch phase. Interest rates range from 12% to 45%, and you can qualify if you have a credit score above 530 and your tow truck business generates minimum monthly revenues of $10,000.

Short Term Business Loan

A short term business loan is often used to fund a smaller project – such as investing in new route-planning software – which will be completed within a year. 

After you’ve been operating your business for one year and if you have a minimum credit score of 650 you can apply for a short term loan. Lenders require minimum monthly revenues that exceed $10,000, but you can borrow as little as $15,000, and there are no prepayment penalties.

If it’s time to borrow for your tow truck business, reach out to Shield Funding today. We partner with small businesses to support their daily operations and plans for growth. One of our lending experts can answer your questions and help you find the best loan product.