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How To Start A Towing Business

How To Start A Towing Business

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How To Start A Towing Business

How To Start A Towing Business

If you’d like to establish a business that offers a profitable service that people depend on, then starting a towing business might be the right choice for you.

Starting a towing business might seem straightforward, but like any business, it requires careful planning, an understanding of the industry, and a strategic approach to make it successful. Whether you establish a small single-driver operation or have your sights set on expanding the business to include a fleet of tow trucks, the towing industry offers plenty of opportunities.

In this guide, we will explore the business, the steps to get started, and answer some common questions to help you embark on this journey.

Business Overview

Towing businesses offer various services, including towing passenger or commercial vehicles, as well as providing roadside assistance. A towing business may focus its operations on consent towing situations, where a driver or vehicle owner calls the company for help and pays the company. Towing businesses can also establish relationships with services like AAA and may receive service calls and payment directly from AAA.

In addition to helping drivers with disabled vehicles, towing businesses may also offer nonconsent towing services. In these situations, the towing company is called by a property owner or by the police, and they remove a vehicle without the owner’s knowledge.

Towing businesses may be single-driver operations, or they can be much larger and encompass a fleet of tow vehicles. Some towing businesses have a holding yard where they store towed or impounded vehicles, while others operate out of a single garage and do not store the vehicles they tow.

Industry Summary

The towing industry brought in over $9.5 billion in revenue in 2022, serving both individual and commercial customers. Passenger vehicles make up a majority of tows, but there’s also demand from commercial towing for vans, buses, construction equipment, semis, and more. Towing services range from roadside assistance to police impounds to junk car removal. Businesses in this industry typically operate on a local or regional level, servicing a specific geographic area.

Several trends are currently shaping the towing industry. First, there’s a growing emphasis on technology, with many companies investing in advanced dispatch systems and GPS tracking for improved efficiency and customer service. There’s also an increasing focus on professionalism and training as customers demand higher levels of service and safety.

Target Market

The target market for a tow truck company primarily includes the following groups:

  • Individual vehicle owners: These are everyday individuals who own a vehicle and may require towing services due to breakdowns, accidents, or mechanical issues.
  • Commercial fleet owners: Businesses that own fleets of vehicles, such as delivery companies, rental car companies, or taxi services, often need towing services for maintenance or in case of breakdowns.
  • Auto repair shops: Towing businesses often form partnerships with auto repair shops, providing towing services for their customers when needed.
  • Insurance companies: Insurance companies frequently require towing services for their policyholders after accidents or breakdowns. Many have preferred service providers and establish contractual relationships with towing companies.
  • Law enforcement agencies: Police departments and other law enforcement agencies often contract with towing companies to remove abandoned, illegally parked, or impounded vehicles.
  • Property managers and Homeowners Associations (HOAs): These entities may need towing services to enforce parking rules and regulations on their properties.
  • Motor clubs and roadside assistance providers: Organizations like AAA contract with local towing companies to provide services to their members.

By understanding the needs and preferences of these target markets, a towing business can develop effective marketing strategies and provide services that meet the specific needs of each group.

Checklist To Start A Towing Business

Starting a towing business involves more than just the technical skills required to operate a tow truck. It also requires a solid understanding of business management, funding, registration requirements, marketing, and more.

By following the steps outlined in this guide will help set your towing business up for success!

Step 1: Assess the Market

Researching the demand for a towing business before starting one is crucial for several reasons. First, it helps you understand the market size and whether there are enough potential customers to sustain your business. Second, it can help you identify your target audience, their needs, and how to best reach them. Finally, it can provide insights into the competitive landscape and help you develop strategies to differentiate your business.

Here’s how you could go about assessing the demand for a towing business:

Analyze demographics and traffic data: Studying the local population, businesses, number of registered vehicles, and common breakdown locations can give insights into the potential demand and other factors that might indicate a need for towing services. Check with the Department of Transportation, local law enforcement, the Chamber of Commerce, and economic development office to see if they have access to this data.

Competitor analysis: Identify other towing businesses in your area and evaluate their services, pricing, and customer reviews. If there are many competitors, but they all have poor reviews, this could indicate a market opportunity for a company that provides superior service.

Talk with potential partners: Talk with complementary businesses like local auto repair shops and insurance companies. Ask about their experiences with existing towing services and their interest in a new provider.

Step 2: Write a Business Plan

Writing a business plan for a towing business is the next step in turning your vision into a reality. It’s like a roadmap, guiding you through the process of starting and managing your business. It also helps you articulate your ideas, set realistic goals, and measure your progress.

If seeking a loan, a business plan is essential. It provides the background and financial analysis lenders need to evaluate the profit and repayment potential of this business. All sections are important, but there are some key sections that help build confidence in you as a borrower.

One of the key sections of your business plan should be the market analysis. Given that you’ve already conducted market research, this section should detail your findings, including the size of your target market, customer needs, and how your towing business will meet those needs. This will demonstrate to potential lenders that there is a demand for your services.

The marketing strategy section is another significant area. This should outline how you plan to attract and retain customers. For a towing business, strategies might include partnerships with auto repair shops, contracts with local government entities or businesses, and digital marketing tactics to reach individual car owners.

The management team is also important because the success of a business is often tied to the people behind it. Highlighting the experience and qualifications of your team can build confidence among potential investors. If you’re planning to hire staff or partner with other professionals (like mechanics or recovery specialists), mention this in your plan.

The financial projections section is an area where lenders will spend most of their time and should provide an estimate of your startup costs, ongoing expenses, and projected revenue. This will not only help you plan your budget but also show potential lenders that you have a clear understanding of the financial aspects of running a towing business.

Related: How to write a business plan

Step 3: Secure Funding

The next step, which is often the most difficult, is getting the funding in place. Launching a towing business requires significant upfront capital for trucks, equipment, licensing, marketing, and initial operating costs, but there are several options available to aspiring entrepreneurs.

The first and most common source of funding is personal savings. The major advantage of this method is that it requires no repayment or interest, so it doesn’t place any additional financial burden on the business. Depending on the scale of your operations, startup costs for a towing business can range from moderate to high. Unless you have a large amount of cash tucked away, personal savings will likely only cover a portion of these costs, and outside funding will be needed.

Here’s an overview of common outside funding sources.

Friends and family: Funding from friends and family can be an effective way to raise funds, but it’s important to treat these loans as business transactions. That means putting agreements in writing to avoid misunderstandings and protect relationships.

Bank loans: Banks and credit unions are common sources of funding for towing businesses. Requirements often include a good credit score, sufficient collateral, and a substantial personal investment in the business. If a bank feels that a loan is too risky, they may use an SBA (Small Business Administration) loan guarantee to lower their risk, making it easier to secure the loan.

Lease financing: Leasing trucks rather than purchasing them outright can preserve capital in the early stages. Lenders evaluate your credit and business plan when qualifying you for leased vehicles.

Microloans: Another funding for businesses that need smaller amounts of funding or can’t secure a traditional loan is microloans. These are small, short-term loans, often provided by local economic development organizations. Many microloan programs also offer business training and support, which can be helpful for new entrepreneurs.

Angel investors: Investors can be a source of funding for your towing business. These are typically local individuals with a high net worth. However, securing investment can be challenging. Angel investors often seek businesses with high growth potential and scalability, which might not apply to towing businesses. Nevertheless, if you have a unique business model or a plan for rapid expansion, it could be worth exploring this option.

Related: Finding the money to start a business

Step 4: Register the Business

Starting a towing business involves careful attention to legal details. Each state has different rules, but there are several requirements for forming and registering a new towing business. Here is a general overview.

Choose a business structure: The first step is to choose the right structure for your business. The four main types are sole proprietorship, partnership, corporation, and Limited Liability Company (LLC). Each has its pros and cons.

  • Sole proprietorship: This is the easiest and least expensive type of business to set up. However, it doesn’t provide any liability protection, meaning your personal assets could be at risk if your business is sued.
  • Partnership: This is similar to a sole proprietorship but involves two or more people. Partners share in the profits and losses of the business.
  • Corporation: This offers the most liability protection but is the most complex and costly to set up. It’s usually best for larger businesses or those seeking investment.
  • LLC: An LLC provides liability protection, meaning your personal assets are protected if your business is sued or incurs debts. It’s more complex to set up than a sole proprietorship or partnership but easier than a corporation, making it a good choice for small businesses.

Related: Comparison of business structures

Forming an LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.

Some popular LLC formation services include:

IncFile - $0 plus state fees & free registered agent for 1 year!

ZenBusiness - Best for beginners. $0 plus state fees & free registered agent for 1 year!

Northwest - Best privacy protection. $39 plus state fees & free registered agent for 1 year!

Business name registration: After registering the business structure, you may need to register your business name. This process will vary depending on what business structure you pick. Sole proprietors and partnerships will often be required to register a “Doing Business As” (DBA), while corporations and LLCs register with the state during the formation process.

Related: Tips and ideas for naming a towing business

During this time, it’s also a good idea to check if the name you want is available as a web domain, even if you’re not ready to set up a website yet.

Related: Finding a domain name for your business

Obtain business licenses and permits: Towing businesses often require specific licenses and permits. In most states, a tow truck operator license will be required for all drivers, in addition to a Class B license, due to the weight of the truck. Also, many cities require a business to obtain a towing license before starting operations.

In addition, there will likely be a variety of general licenses or permits needed before starting. This could include a business license, seller’s permit, and Employer Identification Number (EIN).

Related: State guides for general business licensing

Step 5: Find a Location

Once funding is secured and your towing business is registered, the next crucial step is acquiring a location for your operations. This is not just about finding a place to park your tow trucks, but also establishing an office space, equipment & vehicle storage, and potentially a client reception area. Here are a few steps to help you prepare your towing business location:

Identify your needs: Consider factors like the size of the facility, proximity to major roads, accessibility for large vehicles, and security. You may need space for tow trucks, storage of impounded vehicles, and customer service areas.

Visit similar businesses: Visiting other towing businesses can provide valuable insights into how they operate, the layout of their premises, and potential challenges or opportunities.

Check zoning laws: Research local zoning laws to ensure that the property is zoned for towing operations. There may be restrictions related to noise, traffic, or environmental factors. Some areas may not allow businesses like towing companies due to noise, traffic, or other concerns. You can usually find this information through your city or county’s planning department.

Prepare the space: Once you’ve secured a location, you’ll need to prepare it for your business. This might include setting up an office, installing security measures, organizing equipment storage, and making any necessary repairs or renovations. If you plan to receive clients at your location, prepare a place for them to wait.

Step 6: Purchase Equipment

Coming up with a good business idea and having the skills to run it are one thing, but getting the funding to start a towing service is another.  Funding to start a towing business can be difficult due to the expense of property and trucks.  In order to get a loan, the borrower(s) will need to have good credit and be able to personally invest 15-25% of their money towards the total start-up costs.

Step 7: Obtain Insurance

Getting the proper insurance coverage for a towing business is not only legally required in most states but is also essential for protecting the owners and businesses from various risks. Be sure to research your specific state laws, but a few types of insurance to consider include:

  • General liability insurance: Protects the towing business if a customer is injured while on the business’ property, such as by a slip or a fall.
  • On-hook insurance: Covers potential damage to customers’ vehicles while they are being towed.
  • Garage keepers insurance: Sometimes referred to as garage service, is insurance that pays for damage, vandalism, or theft that might occur to a customer’s vehicle while it’s being stored in a towing business’ storage yard.
  • Tow truck insurance: Specialized insurance that covers the trucks themselves.
  • Commercial property insurance: Covers damage to your property or equipment.

Related: What types of insurance does a towing business need?

Step 8: Hire Employees

Hiring employees for a towing business involves several legal considerations. The first is ensuring that potential employees have the appropriate driver’s license. In many cases, this will be a Class B driver’s license, which permits the holder to operate heavy vehicles, such as tow trucks.

Employee classification is another important aspect. According to the IRS, there are three common law rules to determine if a person can be considered a contractor: behavioral control, financial control, and relationship of the parties. Misclassifying an employee as an independent contractor can lead to legal complications.

Some roles in a towing company may also require physical assessments. This is especially true for tow truck drivers who need to handle heavy equipment and work in potentially risky situations. In addition, towing businesses must adhere to Occupational Safety and Health Administration (OSHA) standards. This involves maintaining a safe work environment and following specific industry guidelines for equipment usage, training, and safety procedures.

Last, if you plan to hire employees, you’ll likely need to provide workers’ compensation insurance. This insurance covers medical expenses and lost wages if an employee gets injured on the job and is a requirement by law in most states.

Related: Hiring your first employee

Step 9: Create a Marketing Plan

Getting ever so close to launching your new towing business, the next step is marketing.

Think of it like a big sign on the road: without it, drivers wouldn’t know where to turn when they need a tow. Marketing helps spread the word about your services, so when someone’s car breaks down, they think of calling you first. It’s about getting your name out there, building trust with customers, and making sure you’re the one they call when they need help on the road. Without marketing, even the best towing service might go unnoticed. A few ways towing companies go about promoting themselves include:

Building relationships with insurers, local automotive repair shops, collision centers, and gas stations is often at the core of promoting a towing business. Offering referral incentives or establishing partnerships can create a steady stream of business.

Building a professional website with clear information about your services, pricing, and contact details and optimizing it for local searches can boost your visibility. Another effective method is to lean into the power of social media. You could consider collaborating with businesses in similar industries and ask to be featured on their social media platforms. This not only increases your reach but also establishes valuable partnerships.

Claiming your business on relevant online business directories is also essential. This includes Google My Business, Yelp, and other local directories. These platforms can increase your online presence and make it easier for potential customers to find you. Encourage satisfied customers to leave positive reviews on your website or other review platforms. Good reviews improve your reputation and can help attract new customers.

Don’t forget to use truck wraps, decals, and other signage to turn your fleet into moving billboards.

Last, joining your local Chamber of Commerce can provide networking opportunities and increase your business’s visibility within the community. It’s an excellent way to build relationships with other businesses and potential customers.

Related: Low-cost ideas to market a new business

Step 10: Prepare to Open!

Starting a towing business entails several crucial steps, and while we’ve gone over a lot so far, there are likely going to be several more tasks to complete. Every business owner will have different needs based on location, size, and specific services, but here are some of the most common aspects you’ll need to address before starting your towing business.

Bookkeeping: Setting up a bookkeeping system to manage your finances is important. This will help track income, expenses, and taxes, making it easier when tax season rolls around. You can use software like Wave Accounting (FREE) or Quickbooks, or hire a professional accountant to help manage this aspect.

Contracts: Drafting clear and detailed contracts is necessary for various business relationships. For instance, you might need a “Tow Service Agreement” outlining the services you provide and the terms of your service or a “Storage Agreement” if you plan to store vehicles.

RocketLawyer and Law Depot have free and inexpensive templates that may be helpful. Make sure to have these reviewed by a legal professional to ensure they comply with local laws and regulations.

Bank account: Opening a separate bank account for your towing business is another task that should be considered. It helps keep your business finances separate from personal funds and simplifies bookkeeping.

Management software: Investing in specialized software can streamline operations. A couple of popular options include Towbook and Dispatch Anywhere, and these systems can help streamline operations, dispatch drivers, invoice customers, and more.

Accept credit cards: Being able to accept credit cards will make transactions more convenient for your customers. Various merchant services such as Square or Stripe are available that can facilitate card processing without the need for complex technological integration.

Join towing associations: Groups like state towing associations and national organizations like the Towing & Recovery Association of America and the Emergency Road Service Coalition of America provide guidance, resources, and networking.

Greg’s Tip: Before starting your towing business, it’s essential to understand the local market demand, competition, and pricing. Failing to research these can lead to pricing your services too high or too low, or entering an oversaturated market

Greg's Business Tip

Common Questions When Starting A Towing Business

How much does it cost to start a towing business?

The cost of starting a towing business can vary significantly depending on details like the number of trucks and drivers, whether the business has a garage and vehicle storage yard, and more.

On average, starting a towing business typically involves a total initial investment ranging from $150,000 to $2,000,000. Here’s a more detailed breakdown of the costs:

Tow trucks: The most significant cost is typically the purchase of the tow truck itself. A new, well-equipped tow truck can cost anywhere from $10,000 for a used vehicle to over $200,000 for a brand-new, top-of-the-line truck

Equipment and tools: Additional towing equipment like hooks, chains, winches, and safety gear may run between $5,000 to $10,000.

Insurance: Insurance is another significant expense. Given the risks associated with towing, adequate insurance coverage is crucial. Initial insurance costs can range from $10,000 to $20,000, depending on factors like the number of trucks, drivers’ driving records, and the areas you’ll be operating.

Marketing: Initial marketing expenses, such as creating a website, vehicle signage, branding, and advertising, could cost approximately $2,000 to $5,000.

Licensing and permits: Depending on your location, you’ll need various permits and licenses to legally operate a towing business. This could add up to $1,000 to $3,000.

Office space: If you plan to rent office space, the initial setup cost might be around $2,000 to $10,000. Purchasing a property will increase this greatly.

Miscellaneous costs: Additional costs like uniforms, stationery, and other miscellaneous expenses can add another $1,000 to $3,000.

Recommendation: While these figures provide a general outline of the startup costs, it’s wise to also have three to six months of operating expenses on hand as a buffer. This financial cushion can be invaluable in helping you navigate the initial phase of your business without worrying about immediate cash flow problems.

Every business has its unique costs and nuances, and understanding these specific costs for a towing business ensures you’re well-prepared to launch with a solid financial foundation.

How profitable is a towing business?

Profit in the towing business can vary widely based on a range of factors, including location, competition, types of services offered, and the efficiency of operations.

Let’s break down a general formula to provide an estimate.

Revenue: The average revenue for a towing service might be around $100 to $150 per tow. If a small towing service manages to complete 10 tows a day, it translates into daily revenue of $1,000 to $1,500, or approximately $30,000 to $45,000 a month.

Expenses: On the expense side, industry data shows costs like payroll, fuel, insurance, loan payments, maintenance, dispatch system fees, and other overhead costs average 65% of revenues.

This means a towing company making $30,000 to $45,000 per month could expect operating costs between $19,500 and $29,250.

Profit calculation: Using these numbers, the monthly profit would be calculated as follows:

Revenue: $30,000 to $45,000
Expenses: $19,500 to $29,250
Profit: $10,500 to $15,750

So, the final profit could fall in the range of $10,500 to $15,750 per month or $126,000 to $189,000 per year.

It’s essential to note that these numbers are illustrative and can fluctuate based on the specific circumstances of the business.

What skills are needed to run a towing business?

While starting a towing business doesn’t require a business degree, there are some other important requirements that a tow truck driver and business owner will need to have.

Driving experience and a CDL: It goes without saying that before you open a towing business, you should be a good driver capable of skillfully maneuvering large vehicles. But, depending on the size of the tow truck you’ll be driving and the vehicles that you will be towing, you may need more than a standard driver’s license.

According to Towing SOS, the U.S. Department of Transportation requires any tow truck driver driving trucks and cargo weighing over 26,001 pounds to have a commercial driver’s license (CDL). Some states also require all tow truck drivers to have a CDL.

Tow truck driver certification: Towing SOS also states that all tow truck drivers must earn their tow truck driver certification. State-certified programs offer this certification, and it can differ from state to state.

Physical health: Good physical health is also important for tow truck drivers. Good vision and hearing are a must, and if a driver is applying for a CDL, they will need to pass a health screening by the Department of Transportation. Drivers must pass a drug test and will have their blood pressure, eyesight, hearing, and more evaluated during the testing.

Background in mechanics: Knowledge of vehicle mechanics can help truck drivers provide better roadside service to drivers. Tow truck drivers who can do their own vehicle maintenance can also save money over paying a mechanic.

Problem-solving skills: Truck drivers never know what to expect when they arrive at a call, so problem-solving skills and a little creativity are valuable in this profession.

Customer service skills: Many tow truck drivers spend a large amount of their time interacting with customers. Good phone etiquette and in-person customer service skills are important for drivers. Tow truck drivers may often interact with stressed or upset people, so the ability to remain calm and diplomatic in higher-stress situations can help a driver be successful in their job.

Marketing skills: When starting up a new towing business, marketing skills are important. A towing business owner doesn’t have to have professional-level marketing skills, but the ability to do some basic brochure or flyer marketing as well as some networking can help to build up a good business reputation and customer base.

What is the NAICS code for a towing business?

The NAICS code for a towing service is 488410.

The NAICS code (North American Industry Classification System) is a federal system to classify different types of businesses for the collection and reporting of statistical data.

Related: What is a NAICS code?

How To Start A Towing Business

How To Start A Towing Business

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