Contributed by Rob McCutcheon, Vice President – Strategy & Growth, TAFS
Company truck drivers with ambitions of becoming independent truck owner operators have been in a holding pattern, waiting for the freight market to recover. Could their window of opportunity be emerging? It certainly appears so.
Data suggests rates are bottoming out, and trucking industry analysts are forecasting a future that, while not rosy, is certainly pink-hued. For those passionate about owning their own trucking business, the time to plan for a successful market entry is here.
Like the rewards, the risks are sizable; only 30% of new carriers will survive beyond a single year. How do they beat the odds and blow out the first-anniversary candles? By focusing on strategic thinking and long-term planning, with sustainability in mind.
Drivers with clear visibility into the challenges ahead, who think in terms of three- and five-year plans, are the ones who will succeed.
What’s the freight industry economic outlook?
First, the headwinds: Carriers are struggling against a challenging economic backdrop, and events like the presidential election, Red Sea conflict, war in Ukraine, and looming port strikes are introducing uncertainty into the market. While inflation shows signs of improvement, consumers still face higher prices — and less disposable income translates to lower freight demand.
The wind may be at drivers’ backs soon, however. According to FreightWaves senior analyst Tony Mulvey, “Linehaul spot rates are now just 45 cents per mile below contract rates. The spread has narrowed by 19 cents per mile over the past year.” This narrowing gap suggests more favorable conditions could lie just ahead.
Bloomberg Intelligence Senior Analyst of Transportation and Logistics Lee Klaslow agrees. “I think it could happen [in] the fourth quarter,” he said. Pointing to consensus predictions of sub-2% GDP growth, he informed 2024 TMSA ELEVATE attendees that “GDP is becoming a better indicator of overall freight demand.”
While no one is suggesting that a scorching-hot economy awaits just around the corner, we have finally reached the bottom of the freight cycle and truckload rates are expected to increase by low single digits in 2025.
Timing truck owner operator market entry for the recovery
If analysts are proven right, drivers eyeing the transition to independent owner operator trucking could find it a viable option by January 2025, but they’ll need sufficient savings before they leap. Those who want to thrive should consider going independent with $25,000 in the bank.
This reserve will be critical to covering start-up costs, unexpected expenses, and cash-flow interruptions. Many new owner operator drivers will discover they can only take four days off a month and remain profitable, for instance. Without this safety net, they’re just one bad stomach flu from going under.
With savings in place, however — or at least a plan to grow it — drivers are ready to begin planning their market entry.
2-6 months out: Create an owner operator business plan
A well-researched business plan is critical to accelerating the path to profitability, and it begins by:
- Conducting a competitive analysis
- Defining target customers, lanes, and services
- Developing a cash flow plan
In documenting expected fixed and variable costs, drivers will likely discover they need to generate $2,500 in weekly revenue to stay afloat and $3,000 before they turn a profit.
If all signs point to go, drivers will also want to define how they’ll market their services.
1-½ months out: Formulate a tax plan
Independent contractors can seize significant tax advantages, though operating as a 1099 worker requires financial discipline. Quarterly estimated tax payments are required, and falling behind can cost truck owner operators their businesses.
Working closely with a tax advisor helps set commercial drivers up for success. They estimate annual tax obligations, and help set up payment plans accordingly.
They’ll also share insight into the documentation needed to maximize driver business deductions and incentives, and explain any relevant additional expenses to be expected, like the quarterly IFTA tax.
3-½ weeks out: Register the business
Meeting with a business attorney can help drivers determine their best-fit business structure: Sole proprietorship, LLC, or corporation.
Many find that registering as an LLC is the right answer, as it’s simple and inexpensive to set up, while also streamlining tax reporting. More importantly, LLCs minimize drivers’ personal liability should they go through bankruptcy or be named in a lawsuit. For most choices, drivers must acquire an Employer Identification Number, or EIN from the Fed.
3 weeks out: Purchase assets
Many prospective owner operator truck drivers will finance a used truck, along with a trailer if they don’t intend to lease onto a large carrier.
The good news for drivers seeking their own business is that the market is currently favorable to buyers, lowering their barrier to entry. “Used truck prices are down 20% year-over-year,” noted 2024 TMSA ELEVATE speaker Dean Croke, a principal analyst at DAT Freight and Analytics. By his estimate, tractors still under warranty can be purchased for an average of $60,000.
2-½ weeks out: Apply for operating authority
To legally operate their new trucking company, CDL drivers must apply for both a motor carrier and USDOT number. Once they have an EIN in hand, they can begin the process using the FMCSA Unified Registration System. (While drivers can apply for their authority with their social security numbers, using an EIN is the way to go. It minimizes personal liability.)
Drivers can expect to pay $300 for a single federal operating authority, although they may require multiple authorities if they plan to haul a range of cargo.
10 days out: Secure a truck driver factoring partner
Many new owner operator truckers are surprised to discover payment terms are often 30 days, and it may take 60 to 90 days or more for those payments to be posted to their accounts. In essence, they’ll float short-term loans to every customer — and if they’re slow to pay, that could put them on shaky ground.
As banks won’t extend a line of credit to owner operators, drivers must find an alternate means of ensuring cash flow to their business. For most, that means partnering with a factoring company to advance them on their freight invoices for a nominal fee.
Drivers can minimize their risk by choosing a stable partner that’s been in business for at least three years, and has a track record within the transportation industry.
10 days out: Sign up for a fuel card
Diesel accounts for approximately one-third of a driver’s operating expenses. Finding ways to save at the pump will be key to their financial viability.
Whether issued by a bank, through an industry partner, or as a travel center loyalty program perk, these cards provide valuable benefits and discounts. Drivers should keep in mind that there is no single fuel card that’s right for everyone. As they assess the options, they should weigh the in- and out-of-network savings offered by each and get clarity on any relevant lane restrictions.
They’ll also want to understand the various charges involved, which may include activation fees, transaction fees, monthly/annual fees, payment processing fees, and more.
1 week out: Secure insurance
Before they take to the road, drivers must have cargo and liability insurance in place for their trucking business. Owner operators can expect to pay about $15,000 per year for that coverage, and their insurance agent will expect a down payment of 15-25%.
With that truck insurance in hand, drivers can then file their Universal Carrier Registration (UCR) Permit, which verifies that they have the active coverage required to legally operate.
1 week out: Identify a method for booking loads
It’s unlikely that shippers will work with new owner operators directly, and many brokers expect three to six months of experience before entrusting them with client loads. Drivers must therefore have a plan for booking their freight. While many ultimately find their own through load boards or broker relationships, it can be a lot to take on when they’re just getting a business off the ground.
No-commitment dispatch services in those early months can simplify the transition. These partners will find loads in drivers’ lanes, and their experience often enables them to negotiate higher freight rates. When drivers feel confident about taking that next step, they can leverage a load board or work with multiple brokers directly to boost margins.
Diversification is key to mitigating risk
Cargo theft is rampant. CargoNet estimates $154.6 million in goods were stolen in the first quarter of 2024 alone. Scott Cornell, transportation lead and crime and theft specialist at Travelers, tells FreightWaves that double brokering is, “one of the most common, if not the most common, method that we’re seeing in the industry right now.”
The down market has also threatened the day-to-day financial viability of some freight brokerages.
If drivers concentrate too much business with any single customer, vanishing volumes or a failure to pay could leave them with nothing. It’s why smart independent owner operators diversify their customer base, giving no more than 20 percent of their hauling capacity to any single debtor.
Preparation breeds success for owner operator truck drivers
All indicators point to a rebalancing freight market, translating to opportunity for freshly minted owner operators. For entrepreneurial drivers unafraid of hard work, who crave independence and a chance to build a trucking company of their own, the window is opening.
By investing time in strategic business planning now, new business owners position themselves to achieve success as volume returns to the market in the new year.
FAQ
An estimated 70-80% of owner operator trucking companies fail within the first year. Inadequate business planning, unexpected expenses, and difficulty finding loads are the main factors behind many of these closings.
Whether becoming an owner operator trucker is worth it depends on individual circumstances, skills, and market conditions. While it offers potential for higher income and independence, it comes with more financial risks and responsibilities than company driver jobs.
A local truck owner operator’s gross annual income can run from $50,000 to over $200,000, depending on location, type of freight hauled, and business management skills. Their annual net profits, however, can be significantly lower after accounting for operational expenses like fuel, maintenance, and insurance.
