Pros and cons of asset based trucking loans

Asset based trucking loans allow truckers and fleet owners to finance new equipment using existing trucks and trailers as collateral. While these loans provide accessible financing and lower rates, they also come with risks.

This article will examine the key advantages these loans offer for acquiring vehicles to grow a transportation business. It also covers the downsides borrowers should consider before taking on asset based truck debt. 

And when you’re finished, check out the other articles in our ‘Asset based lending for truckers’ series:

• Guide to asset based lending for trucking businesses
• Pros and cons of asset based trucking loans
• Best trucking asset based lenders list for trucking

What is asset based lending?

Asset based trucking loans are a specialized type of financing for trucking companies and independent owner-operators to acquire trucks. These loans use the truck itself as collateral, allowing for lower interest rates compared to unsecured loans. Interest rates typically range from 5-15%. The asset based loan amount is based on a percentage of the truck’s wholesale value, usually up to 100%, so newer trucks can qualify for larger loans.

Asset based lending (ABL) terms are generally three to five years for late-model trucks and less for older trucks. The proceeds from asset based truck loans can be used as working capital to expand a fleet or purchase a new or used truck, and they are commonly used to refinance existing truck debt. 

To qualify for asset based finance, borrowers need good credit, around a 650 score or higher, as well as a history of steady income from trucking operations. New businesses may need to provide a significant down payment to secure asset backed loans.

Asset based financing allows small trucking companies and independent operators to acquire trucks for growth even if they have limited capital, making it an attractive option.

Example of how ABL financing works

Meet John, owner of ‘John’s Trucking Co.’ with a fleet of 15 trucks. Business is good, but he wants to grow. John needs $200,000 for new trucks and a software upgrade. Traditional loans aren’t an option due to his credit history. John learns about ABL lending, which could use his existing trucks as collateral.

John contacts asset backed lenders specializing in asset based trucking loans. One of the asset lenders sends an appraiser to evaluate the trucks as loan assets. The appraiser values the fleet at $300,000.

The asset based lending company approves a loan for $200,000 at a 10% annual interest rate. The trucking loan term is five years. Monthly payments are about $4,250. John uses the loan to buy two new trucks and upgrade his software. Business starts to grow.

However, asset backed financing often includes covenants. In John’s case, he must maintain his trucks in good condition and keep them insured. The lender periodically checks to ensure compliance.

After three years, business slumps due to an economic downturn. John struggles to make payments. Since he’s missed two payments, the lender warns him of potential truck seizure. John manages to negotiate a temporary lower payment structure. He gets back on track within six months and eventually pays off the loan in full.

Had John defaulted, the commercial asset based lending company would have seized his trucks to recover the loan amount. But John succeeded, retains ownership of his fleet, and his business grows.

Pros of asset based trucking loans

Here are some of the main advantages of asset based trucking loans.

• Lower interest rates: Since the truck serves as collateral, lenders consider these loans less risky, so interest rates are typically lower than other types of business loans.
• Larger loan amounts: Asset based loan companies will finance up to 100% of the wholesale value of the truck, enabling borrowers to acquire higher-value vehicles.
• Flexible uses: The loan proceeds can be used to expand or upgrade a fleet, or as working capital for business needs. Refinancing existing truck debt is also an option.
• Longer terms: Asset based truck loans typically have three- to five-year repayment terms, making the monthly payments more affordable.
• Easier to qualify: Startups and those with limited credit history can still qualify by using the truck as collateral. A long history of income isn’t necessarily required.
• Preserves capital: Asset based commercial lending provides funding without tapping into cash reserves or forcing the sale of existing assets.
• Potential tax benefits: Interest paid on truck loans may be tax deductible as a business expense.
• Faster growth: Lenders provide capital to acquire the trucks needed to take on more jobs and expand the business.

Overall, a business asset loan offers easier access to financing on flexible terms tailored to the needs of the trucking industry. The trucks themselves enable ABL loans while providing income potential.

Cons of asset based trucking loans

Here are some potential downsides to keep in mind with commercial asset-based lending.

• Collateral risk: If loan payments are missed, the lender can repossess the truck. This leaves the borrower without an income-producing asset.
• Older trucks: Loans on older trucks may have higher interest rates and shorter repayment terms, increasing the risk.
• Costly extras: Asset based commercial lenders may require extras like maintenance reserves, collateral shortfall, or deficiency waivers which increase costs.
• Mileage restrictions: To protect collateral value, lenders may limit annual mileage, affecting use.
• Loan covenants: The loan terms may include stringent financial covenants like a minimum debt service coverage ratio.
• Resale uncertainty: The truck may have a lower resale value later on versus the original loan amount.
• Lender controls title: The lender holds the title until the loan is fully repaid, limiting the borrower’s control.
• Balloon payments: Some loans can have a large final ‘balloon’ payment due at maturity in addition to regular installments.
• Prepayment penalties: Paying the loan off early may incur fees and penalties.
• Rates may rise: If taking a variable rate loan, the interest rate could increase over the loan term as market rates change.

Overall, borrowers need to weigh the risks and costs against the benefits when considering an asset based truck loan. Managing the loan prudently is key.

Asset based lending costs

Overall, asset based lending rates hinge on the loan specifics, but typically range from 5% to 15% annually. Strong collateral and borrowers can expect to see rates between 6-10%. 

Rates are based on the risk level of the loan, with higher-risk borrowers paying rates toward the higher end of that range. Loans for newer assets like equipment or trucks tend to have lower rates, while loans on older assets are higher risk and have higher rates.

Loan amounts also affect rates. Larger loans over $1 million may have rates around 5-7%, while smaller loans under $250k might be 8-12%. The type of lender impacts rates too. Banks tend to offer lower rates, whereas alternative and specialty lenders may charge higher rates.

Variable and fixed rates are available. Fixed rate loans remove uncertainty, but have slightly higher rates. Loans against assets with stable, predictable values get better rates.

Keep in mind that your geographic location can impact rates as well.

Are asset based trucking loans right for you?

Make sure you carefully consider the pros and cons outlined above to determine if asset based lending aligns with your business goals and risk tolerance. With prudent management of the loans, asset based financing can provide you with the vehicles required for growth while preserving capital in a competitive transportation market.

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