Cost Per Mile, and the Cost of Capital Nobody Costed

A fleet owner can tell you the cost per mile of fuel, tires, maintenance, insurance and driver pay, and can tell you how each of them moved last quarter.

Ask the same owner what the financing function costs per mile and the answer is usually a rate on one recent deal, which is a different question entirely.

Everything in this business is measured except the capital. That is the subject of this page, and it is an arithmetic problem before it is anything else.

What a fleet is, financially

A set of depreciating assets bought with somebody else's money. Tractors, trailers, and the shop equipment and technology behind them, each acquired on its own date and each carrying its own security agreement.

Every unit loses value while it is still being paid for. A building generally does not do it. A truck does it from the first mile.

The assets are also the production. Selling one reduces the revenue that services the rest, which is why fleets rarely shrink gracefully.

And the whole structure is financed continuously. Not periodically but continuously, which is the difference the next section is about.

Why a fleet is not a single machine

A dental practice replaces a machine and then has quiet years. The financing is an event, and then it is forgotten until the next one. That argument is set out under dentists and the equipment cycle and it is not repeated here.

A fleet has no quiet years. Units bought in different years wear out at different times, so there is always one being specified, one being financed, one mid term and one being disposed of.

So the financing is a department. It is a standing function of the business in the same way that dispatch and maintenance are, and nobody thinks of it that way because no invoice arrives with that heading on it.

And whoever performs a standing function is paid for it, permanently. That is the whole argument. Everything after it is detail about who could perform the function and what it costs when somebody else does.

The security is the truck

Equipment finance is secured on the unit itself, registered against it, and frequently supported by a personal guarantee from the owner. That is an ordinary arrangement and a lender that does it is doing exactly what it exists to do.

It also creates a circularity that is specific to this industry. The asset securing the debt is the same asset that has to keep earning to service the debt. A lender's remedy is to take the thing that produces the revenue.

Which is why a thin quarter is more dangerous here than elsewhere. A dental practice with a slow month still has the chair. A fleet with a missed payment can lose the working asset itself.

Capital already under the corporation's control changes what a thin quarter means. It changes whether the response to it has to be negotiated with somebody whose security is the unit that has to keep running.

What the equipment lender is paid for

Three things, and only two of them are services.

Capital the business did not have when the unit was needed. That is real and worth paying for, because a tractor that arrives when a lane needs covering earns from that week.

The risk that the business does not pay. Also real, also priced, and priced higher for a young fleet or one with a weakened safety record, which is why the earliest units are usually the most expensive to finance.

And the financing function itself. The arranging, the holding and the recovery of the money. This is the recurring margin, it is charged on every unit and every cycle, and it is the only one of the three that a business holding its own capital could perform for itself.

What a factoring company is paid for

A separate arrangement with the same three components, priced differently. A factor advances money against invoices that have not been paid, accepts the risk that a shipper does not pay, and administers the collection.

It is quoted as a discount rather than as a rate. A percentage off an invoice paid in twenty days and the same percentage off one paid in sixty days are entirely different costs of capital, and neither is presented that way.

Converting it once is the useful exercise. Take the discount and the actual days outstanding, and express it as an annual equivalent. The figure that emerges is frequently the largest single cost of capital in the business.

None of this makes factoring wrong. A fleet with receivables outstanding and payroll due on Friday is buying something genuinely valuable. The point is only that it should be bought knowingly, at a price the owner has calculated rather than accepted.

Cost per mile, extended one line further

The method already exists inside the business. An owner who costs fuel to the cent has the discipline this argument needs.

So cost the financing the same way. Take the total of every payment on a unit including any buyout, subtract the price of the unit, and divide the difference by the miles the unit is expected to run. That is the financing cost per mile.

Then do it across ten years of units. Nobody has this number, because every deal was negotiated on its own as though the previous four had not happened.

The aggregate is a fact rather than a projection, and it is the figure that changes the conversation fastest.

Infinite Financial Sovereignty®, and whose idea the underlying one was

The underlying idea is not this practice's. The method Nelson Nash named The Infinite Banking Concept® is a mark of Infinite Banking Concepts, LLC, described in his own writing, and neither Canadian Wealth Creation Centre Inc. nor Jose Salloum is affiliated with that organisation or endorsed by it.

Infinite Financial Sovereignty® is this practice's own registered mark, and it names one narrower discipline carried out over decades: that a business should be its own source of capital for the purchases it makes repeatedly.

In practice it means holding capital inside a participating whole life contract issued by a federally regulated insurer. The contract accumulates a contractual value. When capital is needed, an advance is taken against the contract rather than arranged with an outside lender, and it is repaid on a schedule the owner sets.

None of it is free, fast, or a way of avoiding interest. The insurer charges interest on an advance. The costs of the contract fall heaviest in the early years. What changes is the destination of the financing margin and the terms of the repayment, not the existence of a cost.

What it would look like across a replacement cycle

The next several units are financed the way they always were. Capital takes years to accumulate and a fleet that begins this does not stop using lenders, whatever presentations in this area routinely imply.

By a later cycle there is a second option on a unit. A trailer replacement, or the deposit on a tractor, can come from capital the corporation controls and be repaid into a structure the corporation owns.

The repayment is the part that decides whether any of it worked. An owner who takes an advance and does not repay it has not performed the financing function, he has borrowed on different paper.

And the death benefit is working the entire time. For an owner whose corporation carries security agreements on every unit and a personal guarantee behind several of them, what it pays on death is not a secondary consideration.

Drivers, and the person the business runs on

An idle financed unit is the most expensive thing in the yard. It carries its payment, its insurance and its depreciation and it earns nothing, so the cost of a vacant seat is the full carrying cost of the asset rather than the wages saved.

Which makes recruitment and retention a capital question. Money spent keeping a driver competes for the same dollars as the next unit, and an owner who costs everything else should cost that comparison too.

And in most small fleets one person holds the business together. The shipper relationships, the safety rating and the dispatch knowledge usually sit with the owner, and none of it appears on a balance sheet listing tractors and trailers.

That gap is what key person coverage is for. It funds the interval in which somebody else is found, or in which the business is wound down in an orderly way rather than a forced one, and it is sized against a business question before it is an insurance one.

The owner's own ability to work

Every arrangement on this page assumes the owner keeps working. In a small fleet that assumption is doing more work than any asset on the statement, and it is uninsured by default. The same exposure is set out for a commission-paid salesperson, whose income stops entirely rather than falling.

Coverage against an inability to work is a category, not a recommendation here. How a contract defines disability, whether it looks at the insured's own occupation, and how income is verified for an owner who draws irregularly matter more than the premium does.

Insurability is also a moment rather than a state. Coverage is priced on health and occupation at the time of application, and it cannot be repriced backwards once something has been diagnosed. Anyone using that fact to create urgency is misusing it.

The priority order follows from both. Buying permanent coverage while carrying nothing against a working interruption inverts the sequence for somebody whose business stops when he does.

The corporation, and what ownership decides

Almost every fleet of any size is incorporated, so the ownership question arrives immediately.

Three decisions are made together or they are made wrongly: who owns the contract, who pays the premium, and who is named as beneficiary. The full treatment is under corporate-owned life insurance, and it is the commonest expensive error in this whole area.

A mismatch does not announce itself. Where one entity pays a premium and another is advantaged by that payment, a taxable benefit can arise for whoever was advantaged, and it typically surfaces years later on an audit or during a sale.

And where there is more than one shareholder, the shareholders' agreement governs. What happens to shares on a death or a departure, and how the remaining owners are expected to fund it, is a lawyer's question that should be settled before an insurance application.

What the corporate tax treatment depends on

On facts about the corporation, confirmed by its own accountant before anything is applied for. That is the argument's load-bearing condition rather than a disclaimer attached to the end of it.

Premiums are generally not deductible, which surprises owners because so much else running through a fleet is. A narrow exception can apply where a policy is assigned as collateral for a loan used to earn income, subject to conditions that must be met rather than assumed.

Growth inside the contract is not taxed annually while the contract remains exempt under Regulation 306, Income Tax Regulations. Exempt status is a condition to be maintained rather than a property the product inherently has, and a contract altered carelessly later can lose it.

On death, the amount by which the benefit exceeds the policy's adjusted cost basis is credited to the Capital Dividend Account under ITA s.89(1), from which a capital dividend may be elected. The credit is the excess rather than the whole benefit, the adjusted cost basis moves over the life of the contract, and the election is a filing that has to be made correctly. Your accountant calculates this.

What this does not do

It does not eliminate interest. The insurer charges interest on an advance, and a presentation that leaves that out has misdescribed the arrangement rather than simplified it.

It does not stop the fleet depreciating. It changes who is paid for financing the replacement, not what happens to the unit being replaced.

It does not replace an equipment line or a factoring facility, and a fleet should keep committed external credit for a replacement that cannot wait and a repair that outruns the reserve.

It does not reduce the corporation's tax bill this year. Nothing here is a deduction, and any suggestion that a premium is a way of paying less tax is wrong.

And it does not outperform a market portfolio measured as a return. Participating whole life insurance is an insurance product and not an investment, which is a difference in purpose rather than in marketing, and an owner shopping on rate of return should expect an honest comparison to go against it.

Who this does not suit

A fleet without durable surplus in a normal year, as distinct from a strong one. Surplus that appears only in the strongest freight markets is not the raw material this requires.

An owner inside a decade of selling or winding down. The early costs will not have been recovered, and the honest answer is no.

A growing fleet carrying expensive debt. Repaying costly borrowing is a certain outcome, and certainty is worth a great deal against anything projected.

And an owner with no coverage against an inability to work, or one whose accountant has not reviewed the structure. Either of those is a reason to stop rather than a detail to tidy up afterwards.

What stands behind the contract

The contractual obligations of the issuing insurer, and nothing else. They depend on that insurer's continued solvency and they are not backed by any government, which is a materially different position from a deposit at a chartered bank.

Assuris protects Canadian policyholders within its published limits where an insurer fails. That is meaningful, it is not the same thing as deposit protection, and the difference is worth understanding before a corporate commitment rather than after one.

Dividends are not guaranteed. They are declared annually at the discretion of the insurer's board based on the performance of the participating account, and past dividend performance does not indicate future results. The guaranteed schedule and the projected values above it are two different columns on the same page and should be read separately.

The order to do it in

Produce the financing cost across every unit acquired in the last ten years. Nobody has added them up, and the number changes the conversation more than anything else on this page.

Then convert the factoring discount into an annual equivalent, using the days actually outstanding rather than the days the agreement assumes.

Then write down the replacement schedule for the next five years, which every owner knows approximately and almost none has recorded.

Then take all three to the accountant, before any insurance conversation. The questions are whether the corporation is the right owner, what the position looks like between active and investment income, and whether the shares are intended to be sold one day.

Then, and only then, ask whether a contract belongs in the picture at all. Purpose first, structure second, product last. Four of those five steps earn nobody anything, which is worth knowing about the order in which they are usually proposed.

Who you are dealing with

IBC Financial is the education platform and trade name of Canadian Wealth Creation Centre Inc. Every client relationship, every piece of advice and every insurance product comes through Canadian Wealth Creation Centre Inc. and its duly certified representatives, and this page is education rather than advice about any particular business.

Everything here is written by somebody paid a commission by an insurer when a contract is issued, which is stated at the foot of every page on this site and is a reason to check the arithmetic rather than to accept it.

The corporate structuring underneath all of it is in business owners, the mechanism of the contract itself is in how a participating policy works, and the way an advance against a contract operates is set out under policy loans.