The Never, Never Plan
by Jim Park
Big trucks cost big bucks, and there's no easy way around that. There are, however, some creative ways to make ownership possible under circumstances that won't wipe you out on the way in. One method is the lease-to-own plan, where you buy the truck from the carrier through a leasing program. Many of the plans currently offered by carriers are perfectly legitimate, practical ways of becoming an owner-operator. Others are simply scams, pure and simple. The bad ones get all the press while clouding the good ones with suspicion, because they appear similar on the surface. Going into a deal like this with your eyes wide open is the best way to avoid making a mistake.
The cynical observer would see a carrier wanting to sell a truck to an employee driver only as a means of downloading cost: to have the employee make the payments, pay the operating costs, and incur all the risk.
The cautious observer would see a carrier wanting to sell a truck to the employee driver for many of the same reasons, but would also see the potential for shared profits derived from managing the small business properly.
The wildly optimistic observer would see the arrangement as a way to vastly improve personal net worth by entering into a no-money-down, no-risk situation. An easy way to buy a truck with nothing to lose except the price of the payment, ignoring all the other operational realities as inconsequential, or just part of the deal.
If you're considering this sort of venture, you had better be in the second category - the cautious observer. The first would likely see every step the carrier takes in the relationship as a means of exhorting more money from the owner-operator, with a view to bankrupting him, before taking the truck back to sell to someone else.
Here are five basic steps to protecting yourself in a lease arrangement:
1. Conduct a credit check on the carrier. If there's an extraordinary level of debt, or evidence of poor financial management, don't get involved. As long as the carrier holds title to the truck, you couldn't walk away with it if you wanted to. If the carrier goes into receivership, the truck you're leasing will likely be seized by the trustee and sold to pay down debt.
2. Remember that you can still be fired. Just because you're making payments on a piece of the carrier's property doesn't exempt you from disciplinary action. Your termination will likely terminate the lease agreement, too. When operating on a business-to-business level, the standard employment rules don't apply.
3. Ask the carrier to provide proof that any expenditures or payments made on your behalf are actually being paid, and assure yourself that any escrow accounts, for things like maintenance, are all protected from the carrier's creditors so that you retain your investment.
4. Ask current lease operators about the plans they're involved in to determine that it's working for them.
5. Ask for an escape clause that allows you to return the truck to the carrier with a minimal penalty, and also demand that you be allowed to pull the truck out provided you pay off any financial obligations. That way, if things don't go as expected, you might be able to finance the outright purchase of the vehicle instead of losing it to the carrier if the work dries up or the relationship sours.
And here are five points to consider BEFORE becoming an owner-operator:
1. Conduct a financial needs analysis to determine if the projected earnings from the truck will be sufficient to meet your existing financial commitments. If there's any doubt that the truck can support you, forget the idea. Track several months worth of personal expenses to get your numbers, accounting for everything.
2. Do you know enough about the business to keep from making too many costly mistakes? Do you earn enough to cover the mistakes you're likely to make while you're learning?
3. Are you comfortable earning a living as a small business operator, as opposed to an employee? The rules are different, and none of the protections offered by labor law apply to the business-to-business relationship you're about to enter.
4. Is your lifestyle going to change dramatically over the term of the contract? Any change that requires the termination of the deal may cost you dearly.
5. Are you prepared to make a four- to five-year commitment to that carrier, and will that carrier be there in four to five years? Think this through very carefully.
The third type likely wouldn't even see the worst coming until it was too late, not believing or caring about what was going on. An easy-come, easy-go attitude makes easy prey for ill-intentioned carriers, and leaves little in the way of a defence should the carrier seize the truck before re-selling it to the next dreamer who comes along.
The one with the realistic view of the relationship will be aware of what the carrier is doing and why. He or she will also see the potential of a modest profit, or at least a less expensive means of acquiring the truck. There will also be an awareness of the risk and the cost of doing business as an owner-operator in today's market, and the need to work with the carrier where possible to minimize operating costs.
In short, it takes two to tango. Not all lease-to-own plans are created equal, but neither are the people who enter into such agreements. Failure of the plan is seldom completely one-sided: more often it's a result of ignorance on the driver's part, likely because the situation doesn't demand the same amount of pre-qualification that a standard truck purchase might. The ones who fail are probably just not knowledgeable enough to take on the responsibility of managing a business. And if there's a little ill will on the part of the carrier thrown into the mix, then the worst outcome is almost a certainty.
The Same Rules Apply
All the same rules apply in a lease-to-own deal as in any other owner-operator's business. There's income, there are expenses, and you get to keep what's left. That means there are fundamental principals of business management involved, and running a business in this fashion isn't any different. Costs are costs, and they shouldn't be taken any less seriously.
The principal difference lies in the manner in which you get into the business. Lease-to-own plans often feature low downpayments - no money down at all in some cases - which means there's likely going to be some kind of a buy-out payment required at the back end. If you want to buy the truck at the end of the term, provided the monthly payments are reasonable (somewhere in the $2200 to $2600 range), saving for the buy-out is possible. Otherwise you may need to borrow to complete the transaction. Or you may want to turn that truck back in and walk away, or get another one on a new lease plan. That's a strategy you'll need to consider.
Either way, when the lease term is up, you'll have a choice to make. Let's assume that trucks like yours are selling for $30,000 on the used truck lots. If you owe $25,000 on the buy-out, you could probably sell the truck and earn a small profit. You could also continue to work the truck, mindful of the increased maintenance costs associated with older equipment. Since you've had the truck for four or five years, you should know what shape it's in and what's likely to go next. Ask yourself, is it worth buying and keeping, or is it better to walk away and get into a new truck? How much would it be worth on a trade-in should you want to go to a dealer for the next truck? If you've managed to save the 25 grand required for the buy-out, is the cash more valuable than the truck?
The key is to have all possible angles mapped out before you start the plan, and be ready to act upon the one that's best for you at the time.
The cost of the truck is something to consider too, and it's not an afterthought. Just because you're buying through a carrier doesn't necessarily mean you're going to get a deal. You'll need to research the price of a similar truck on the retail market, and then compare it to the deal the carrier is offering. If the carrier's price is way higher, it isn't a good deal. If the numbers are similar, which alternative is really the better way to buy? Maybe you wouldn't qualify to buy retail because you don't have the downpayment, or your credit history isn't very good. The carrier deal might be a way around those obstacles, but not at 'any' price.
Do Your Homework
The relationship between you and any carrier deserves a great deal of research, but the stakes are higher in a lease arrangement. Not only does the carrier control the work you do, but also the truck itself. You'll need to know the carrier and how the business works. You'll be working there for the length of the leasing contract, so make sure you're compatible.
The Pros and Cons of Lease-to-Own Plans
- The carrier may institute policies that guarantee the maintenance and upkeep of the asset. They may appear costly, but the truck will be well maintained.
- In the better examples, the carrier may offer guidance in the management of your business. Done properly, this shouldn't be seen as taking control of your operation, just as help in doing a better managing job.
- These plans offer a means of getting into a truck without incurring much personal debt, without tying up a lot of your own money, and without demanding collateral.
- You may not be free to pull the truck away from the carrier, for whatever reason, until the terms of the deal have been fulfilled.
- If the carrier runs into financial difficulty, they might take 'your' truck with them when they collapse.
- The possibility exists, under certain circumstances, that the carrier could short your miles, effectively preventing you from making the lease payments. With little recourse but to give up the truck or starve, you could be forced into forfeiting all you've put into the truck thus far. It's rare, but we know it happens.
Generally speaking, you shouldn't consider a lease-to-own arrangement with a carrier unless you've been there at least six months as a driver. There are just too many potential surprises to make a leap like that much sooner.
You'll also need some money to tie you over until the revenue begins to flow. Aside from the downstroke, you'll need about a month's worth of personal income in the bank to keep you going.
Lately, more attention has been focused on the issue of an owner-operator's labor status: is he an employee or an independent contractor? Depending on the exact circumstances, these lease-to-own relationships can often buttress the case for determining that the owner-operator is in fact an employee. The relationship between the individual and the carrier is often identical to an employee/employer relationship, except that the employee pays the employer for the privilege of working there. At least that's the way Canada Customs and Revenue (CCRA) sometimes sees it.
There are certain things you can do to help tip the scales in your favor should your status ever be called into question by the tax man:
- Incorporate the business as a means of separating yourself from the carrier;
- Maintain your financial independence by not relying entirely on the carrier for things such as fuel cards, parts and repairs;
- Establish business accounts, such as CCRA, WCB, GST, etc., in your own name, rather than relying on the carrier to do the filing.
- And finally, study and compare the various least-to-own options that exist today. Some are winners, some not. The single best way to be reasonably sure you'll succeed is to ask others in the program how they're doing. Asking a few questions up front can save you a miserable experience a few years into the plan. Remember, the term 'Never, Never Plan' - never make any money, never finish paying - didn't materialize from thin air.