Friday, July 18, 2014

Maintaining Equity

Your business will incur debts and it needs to do so in order to run smoothly.  An important consideration is that your debts shouldn't outweigh your income.  The equipment you use shouldn't cost more than its worth.  The equipment should also be able to be sold at a profit or at a reasonable rate so that if you need to sell everything, you can pocket some money and not just break even.

New trucks are appealing because they have a warranty and they meet all of the latest regulations such as the C.A.R.B. regulations in California.  Since they are new, they are less prone to failure due to simply being old.  Older trucks' components wear out.  The plastic and rubber dries out.  The wiring becomes more corroded.  As soon as the truck rolls of the assembly line it starts to age.

Used trucks can be a great deal if they're in good condition or have been maintained.  Even if the used truck hasn't been maintained properly, a skilled mechanic or someone who is mechanically inclined can bring the equipment back up to speed.

The point here is that the value of the equipment should exceed the amount owed on it.  The condition of the equipment is important because the more you keep up with the maintenance and keep records of the repairs, the more value there is when it comes time to sell.  These days where the aerodynamics and fuel efficiency of the truck play a major role in the truck's value, it pays to know when to sell what you have and buy new.

There is also a strategy that is popular where you buy equipment and use it until its at its sell point, then sell it and pocket the money.  Next you buy the equipment with financing to replace your sold equipment and make payments on it while the funds you brought in from your recently sold equipment collects interest in a retirement account.

You can buy and sell trucks, trailers, tools, and anything else your business needs keeping in mind that you should only own so long as there's value.  As long as the value is there, your business will stay in the black.  The best situation to be in is to have a piece of equipment that you can pay off quickly and use for years to come with small payments and little maintenance.  In this scenario, you would buy a new truck at a discount or a used truck for a reasonable price.

You would either make the payments on the new truck or pay the used truck off quickly.  The truck would then be used for several years past its payoff date and the maintenance would be a priority so as not to trump the equipment's former payment amount per month.  It's important to keep on top of the maintenance.  The older the truck, the more attention it needs.


Dave Sanderson said...

One thought on this.
If you buy a truck with payments make sure the term is no longer than three years and 1/4 of income per month. that should allow 1/4th for loan another for everything else(maintenance,plates,fuel,etc.). You keep the other half for your personal expenses(savings too-you know money left over at the end of the month).
I myself have not done this but I have meet many who have done something similar do very well.
When I first started I asked alot of people how much and those around me had not a clue,so it has taken many years of trial and error to survive trucking.

Ed said...

Dave, so true. I like to have a truck payment that can easily be made in one week or less. I agree with everything you said. Putting away money after all the expenses is the hard part.