How Trucking Companies Pay For Fuel Cost During High Peak Seasons
Posted on July 26, 2013 in Transportation
As everyone in America knows, the pain felt at the pump has been pretty severe over the last several years. Fuel prices, especially during peak travel times such as summer, spring break and the holidays, have steadily continued to rise, and have spiked to extremely high amounts at times.
The trucking industry has felt this pain even more acutely than the average commuter. An eighteen wheeler usually has two fuel tanks, one on each side. Each of these tanks generally holds between 100 to 200 gallons of fuel, depending on the type of truck, meaning that to fill up an eighteen wheeler with diesel, it requires between 200 and 400 gallons of diesel fuel.
If one assumes an average cost of $4.009 a gallon, it would cost a truck company around $800 to $1,600 to fill a single eighteen wheeler. Between the long trips most trucks have to make, the heavy loads they are carrying and the large engines required in commercial trucks, most eighteen wheelers will go through fuel at an astonishing rate. Many trucking companies have several trucks in their fleet, and as a result the fuel costs for a typical trucking company can be astronomical.
So how do trucking companies spay for fuel costs at all, especially during the high peak seasons when fuel cost is at its highest? There are several ways in which a trucking company can attempt to finance their trucks' fuel costs and other operating expenses.
Of course, the traditional way of simply paying for it with the company's cash flow is one way to cover these fuel costs However, in some cases a client can take a while to actually pay for their invoices, leaving a trucking company looking at two, three or more months before they are actually paid for a previously completed job. This can lead to stress and possibly even debt as the company liquidizes other capital to pay for fuel and other operation expenses, replacing those assets when the invoices are finally paid.
Another major way that trucking companies cover their fuel expenses is by charging a fuel surcharge. While this fuel surcharge goes a long way towards helping to alleviate the cost of keeping the belly of a fleet of trucks filled, there are a couple of downsides to using fuel surcharges. The first is also the most visible to the public. The cost of fuel surcharges are often passed on by the client company to the consumer; the higher the fuel surcharge, the more consumables cost the average working public, often fluctuating with the cost of fuel.
The second downside to using fuel surcharges is that fuel costs can change rapidly, and there is often a lag between the the money laid out for fuel and the surcharge payment. This means that the short term profit of the truckers or the trucking company can suffer a short term disruption or lessening of cash flow and profit.
Some larger truck companies will hedge their bets with a long term fuel contract signed with a fuel provider. Most companies prefer not to do this, especially during peak fuel cost times, as they could get locked in to a long term rate that is higher than the price at the pump. Additionally, this can end up being of no benefit when a trucker needs to refuel his rig in the middle of a hauling job. The majority of trucking companies prefer to assess fuel surcharges rather than take a risk on getting locked into a high cost contract.
Other companies or independent operators have formed a sort of network with various truck stops. In these instances, there is an agreed on price, usually a "retail minus" or a "cost plus" agreement with various truck stops along an often traveled route. In the retail minus agreement, truckers pay the normal retail price for gas minus a few cents per gallon. In the cost plus model, truckers pay what the truck stop paid for the gas, plus a few extra cents.
Buying in bulk is another sound tactic. If the trucking company purchases its fuel in bulk amounts, the fuel companies are often willing to cut the company a deal on their fuel cost. This is obviously a great idea for trucking companies with large fleets, and the more fuel purchased in bulk, the greater the discount tends to be.
Another way to pay for fuel at a discount, and which which might work even for those companies that are unwilling or unable to purchase fuel in bulk, is to obtain fuel cards for each of its drivers. By using these fuel cards, companies can often save a significant amount of money on each gallon of fuel and, at 200 to 400 gallons per fill up per truck, this can translate into significant savings.
Finally, one way that a trucking company can turn a profit is by using a freight factoring company. Essentially, a factoring company purchases a truck company invoice at a small discount and pays the company or trucker immediately. The factoring company then collects the money from the shipper. In this way, the trucking company gets paid quickly, whether the shipping company that ordered the shipment pays on time or not.
Among trucking companies, the use of factoring companies is common and very popular. Even when the economy is good, some shippers may take up to 45 days or more to pay the trucking company. The time it takes the shipping company to pay their invoices during harder economic times can become even greater and, until a trucking company gets paid it cannot use that money for such essentials as payroll, operating costs and fuel costs.
By going through the factoring company, the trucking company may take a small hit on their invoice, but cash flow is improved to such a degree that it often makes it worthwhile to do so. Additionally, the trucking company can then let the factoring company worry about trying to collect the money for the invoice from the shipper.
It's important to note that using a factoring company is not the same thing as getting a loan. In fact, a factoring company actually has several advantages over securing a traditional loan.
The first advantage of using a factoring company is that it does not create a debt for the trucking company. Because of this, it will not reflect as such on the trucking company's credit, meaning that they can save the need for a loan in order to buy more equipment, such as additional trucks for their fleet.
A second advantage of a factoring company is the fact that it relies not on the credit rating of the trucking company, but on the credit rating of the shippers that hire the trucking company. This is especially important if the trucking company has credit issues or poor credit and cannot find themselves able to qualify for traditional loans through a bank.
The third great advantage of using a factoring company over taking out a loan is that, with most loans, the trucking company is on its own when it comes to collecting the money to pay the loan back. The bank is not going to help the trucking company collect money from the shipper, leaving the collection calls and so on to the trucking company. In contrast, a factoring company will almost always work to collect the money on behalf of its purchased invoices.
Most trucking companies don't rely on just one of these ways to help pay for fuel costs. Many companies diversify and use a combination of these methods to help them out. With fuel costs continuing to rise, it becomes more and more important that companies do the best they can to cut costs. Most companies seek to cut costs so that they can improve their profits and keep their cash flowing, and trucking companies are no exception to this practice.