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How to Start a Towing Business

Overview

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. Experience working with cars and strong driving skills will serve you well in this industry. 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.

Business Overview

Towing businesses offer various services, including towing passenger or commercial vehicles, as well as providing roadside assistance. A towing business may focus their 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

According to IBIS World, from 2014 to 2019, the automotive towing industry underwent 3.0 percent growth, and revenue in 2019 is predicted to total $8 billion. The number of towing businesses has grown to 49,189, and industry employment has also increased to 102,873.

This growth is partially due to the improvements in the economy that also occurred from 2014 to 2019. As the economy improves and the unemployment rate declines, more people rely on vehicles to travel to work, meaning more vehicles have spent more time on the road. This increased employment rate also means that more people have disposable income, prompting them to drive on their own rather than carpool and even choose driving over public transportation. As the number of cars on the road increases, the chances of accidents do, too, which means more people tend to need towing services. The same is true of vehicle breakdowns.

Related Industries

Trucking Business

Industry Trends

The towing industry is highly affected by insurance rates and the overall insurance market. According to Advantage Funding, a shift in the insurance market resulted in an insurance premium increase for tow truck operators. Towing is a high-risk environment, and some insurers have decided that they no longer want to cover towing operations and have been leaving the market.

The towing industry is also directly affected by the number of people who drive. With lower gas prices and increased employment, more Americans are choosing to travel by car. AAA reported a record-breaking 41.4 million Americans planned to travel by car on July 4, 2019. With the 41.4 million travelers on the road for the holiday, AAA alone planned to aid almost 367,000 stranded motorists.

Target Market

The business model that a tow truck business follows will partially determine its target market. A towing business that offers services to consumers for roadside assistance will target drivers, auto repair shops, and insurance companies within its service area. Towing businesses that offer nonconsent towing services will market themselves to local businesses or, potentially, to local police departments and municipalities.

Skills, experience, and education useful in running a towing service

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 speaking 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 to 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.

Checklist for Starting a Towing Business

If you’re thinking about starting a towing business, it’s important to do your research first. Here is a checklist to help you get started.

Step 1: Write a Business Plan

After coming up with the idea, the next step in starting your business should be to write a business plan.  Not only will a bank require you to have a business plan, but multiple studies have shown that a business plan helps increase the odds of starting a successful business.

Related: How to write a business plan

Step 2: Name the Business

Finding the perfect business name can be challenging. Not only does the name have to resonate with your customers, but it also has to be available to use.

Related: Tips and ideas for naming a towing business

Step 3: Form a Business Entity

A business entity refers to how a business is legally organized to operate. There are four primary business entities to choose from, which include the sole proprietorship, partnership, corporation, and Limited Liability Company (LLC). Each type of entity has its own pros and cons, such as liability exposure, costs, and administrative requirements.

When deciding on which business entity is best for a towing business, it normally comes down to the sole proprietorship and Limited Liability Company.

A partnership opens the owners up to unnecessary personal liability because if a partner does something to get the business sued, or runs off with cash from the business, the other partners are personally liable to repay. The corporation can be a good choice because it separates the business assets from the owner’s assets. If the corporation is sued or certain business debts can’t be paid back, the owners aren’t personally responsible to repay them. The downside to the corporation is that it is more complicated than all the other entities and requires more administration than the LLC. If you plan on raising a lot of investment though, the corporation is usually the better choice.

That leaves the sole proprietorship and LLC.

The sole proprietorship is the least expensive and easiest entity to start which is appealing. The downside is the owner is personally liable should anything happen to the business, which is an important consideration. The LLC offers the ability to operate as a sole proprietorship with the liability protection of a corporation. Depending on the state, the cost to form an LLC runs from $40 – $500, which is pretty inexpensive for protecting the owners from business-related lawsuits and certain debts.

Related: Guide to forming your LLC
 

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!

IncAuthority - $0 plus state fees & free registered agent the first year!

ZenBusiness - $49 plus state fees & free registered agent for 1 year!

Step 4: Select your Location

Many towing operations need significant space for their garage and their towing storage yards, which can mean expensive property costs.

Related: Choosing a business location

Step 5: Register for Business 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 will require a business to obtain a towing license before starting the operations.

In addition to towing-specific licensing, there will also likely be general business registrations needed, such as a local business license, sales tax permit, occupancy permit, and others.

Related: Common business licenses, permits, and registrations by state

Step 6: Find Financing

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.

Related: Finding the money to start a business

Step 7: Open a Business Bank Account

Keeping your small business and personal finances in separate bank accounts is important to track the income and expenses of your business and identify trends.
 
Many banks offer free business checking accounts, so be sure to find a cost-effective option for your business.

Step 8: Get your Marketing Plan in Place

Marketing is an essential part of building a towing business’ customer base. Marketing a towing business can include creating and managing social media pages, taking out paid advertising in newspapers and other local publications, developing relationships with driving programs and local mechanics, and even sending direct mail to local businesses.

Related: Low-cost ideas to market a new business

Every business is going to need a logo. Make a professional logo in no time with the free Canvaa logo maker!

Step 9: Get Business Insurance

A towing business needs to consider multiple types of insurance for this higher-risk industry. A few of these include:
– On-hook insurance (sometimes referred to as tow truck insurance) covers potential damage to customers’ vehicles while they are being towed.
– Garagekeepers legal liability insurance 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.
– 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.
– Worker’s compensation insurance is required if a business has employees and covers medical bills and lost wages if an employee is ever injured while on the job.

Policy costs will vary according to location, the value of the equipment a business owns, the number of employees to be covered, driving records, and more. To find the best insurance policy, request quotes from multiple companies, and compare factors like deductibles, policy costs, coverage exclusions, and coverage limits.

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

Step 10: Hire Employees

Towing businesses are unique because they can be started with a single employee, then gradually expanded once the business is established and successful. Zip Recruiter reports that tow truck drivers make an average salary of $35,087. Payscale states that receptionists / dispatchers earn an average salary of $32,230. Some larger facilities may also hire bookkeepers, whose salaries average $42,139, according to Payscale.

Employee salaries aren’t the only expenses that go along with hiring staff. Be sure to also budget for expenses like health insurance, retirement contributions, workman’s comp insurance, and paid time off.

Related: Hiring your first employee

Step 11: Set up an Accounting System

Setting up an accounting system is critical to the long-term success of your business.

Staying on top of taxes not only keeps the business out of trouble with the government, but the numbers can be used to track and monitor trends and cash flow in the business and maximize profits.

Related: Setting up the accounting for your business

The thought of accounting can be intimidating for a lot of new entrepreneurs. There are a number of ways of handling bookkeeping, from DIY to hiring a bookkeeper. These include:

- Pen and paper - Low expense, but difficult to track.
- Spreadsheet - Low expense, but easy to make errors.
- Accounting software - Medium expense, but owner typically inputs expenses. Some great accounting software programs include Freshbooks or Wave Accounting.
- Hire a bookkeeper - Higher expense, though very affordable at $100-$200 per month in most cases. A dedicated bookkeeper will probably save money because, in addition to handling all of the bookkeeping (so you can focus on the business), they also provide personalized tax advice and ensure the business is in compliance.

Find bookkeepers in your local area or use a service like 800Accountant.

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. Starting this type of business will cost about $150,000 on the low end, but startup costs can reach as much as $2 million for larger, more extensive towing operations.

Some common costs to start a towing business include:
– Tow truck(s) and/or flatbed purchase
– Garage and/or storage yard purchase or lease
– Permit and license fees
– Uniforms
– Tools and supplies (lockout kit, traffic cones, flares, etc.)
– Signage

How much does a towing business owner make?

The profits of towing companies vary according to location, the number of trucks and the type of towing the business specializes in. According to Abington Tow Truck, towing business owners typically make between $30,000 and $100,000 annually. A tow truck company that doesn’t just offer towing but also offers emergency roadside assistance can increase its services and profits. Other more lucrative options include offering 24/7 towing services or leasing tow trucks instead of buying them.

Are there grants to start a towing business?

It’s extremely rare to find a grant to start a towing business. If you search for business grants, you will come across a lot of scams and misinformation. Occasionally an organization will offer grants to start a business, however, be skeptical and don’t provide any sensitive personal information or pay money to get more information.

Legitimate federal grants can be found at Grants.gov and you can check on your state’s economic development office to see if they have any grants available.

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?

Resources:
Towing Recovery Association of America

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