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If your business requires a vehicle but you’re short on cash, you will need to obtain a commercial auto loan. Here’s what you should know.
- Commercial Auto Loans Explained
- How to Get a Commercial Auto Loan
- Buying vs. Leasing
Commercial Auto Loans Explained
Commercial auto loans are used by businesses to buy vehicles needed for work-related operations. That includes such tasks as getting products to customers, completing jobs, and transporting employees, among others. This type of loan is offered by banks, credit unions, finance companies, and alternative lenders. It’s quite similar to a consumer auto loan except that far more documentation is required. These loans are available for new and old vehicles as well as for refinancing existing loans. Technically, you could buy a personal-use vehicle with a commercial car loan, but that would be difficult to secure and would be a red flag for Internal Revenue Service auditors.
Because vehicles are considered depreciating assets and they are expensive to buy, many businesses choose to lease instead. But purchasing could be a good option if your company needs the vehicle long term and wants to write off the depreciation on its tax returns.
When considering commercial auto loan lenders, focus on how much of the cost the lender will cover, interest rates and fees, and the repayment term. Many lenders will cover up to 100% of the cost for a new vehicle. But this may not be the case for used vehicles, and many times lenders won’t finance cars and trucks that are five years old or older because they depreciate too much. The interest rates, fees, and loan term depend on the lender and the various factors that go into determining how much of a risk the investment is.
Commercial Truck Loans
Commercial truck financing usually involves transportation vehicles (semi trucks) or vocational trucks (dump trucks, cement trucks, and other work vehicles). In many cases businesses, such as construction, delivery, waste, and farm companies, need spacious vehicles to transport materials. Companies may not have enough money to finance each truck, so many owners turn to commercial auto loans.
Equipment finance companies claim to give loans for individual trucks but they usually require that you purchase at least three vehicles. Lenders prefer that borrowers buy more than one vehicle to ensure that the business can make enough money to repay the loan in the event of a breakdown or accident. For example, if you have 10 trucks and one breaks down, you still have 90% of your fleet on the road. Conversely, if you have only one truck and it breaks down, you may have zero income until it is fixed. Unless you can prove that you have other means of dependable income, a lender will not look at this situation favorably.
Risk factors for obtaining a loan for trucks include being a new business, having poor credit, being an owner-operator, having low cash reserves, and buying an old truck. New owner-operators tend to have a tough time getting approved for a loan because of a lack of credit and revenue history. Having any of these risk factors can lead to a higher interest rate or a down payment that ranges from 10% to 50%.
Typical Commercial Auto Loan Rates and Terms
In the chart below, we show the typical terms, features, and rates associated with commercial auto loans.
$5,000 to $250,000
|Loan-to-Value Ratio||Up to 100% of vehicle value|
|Uses||New and used vehicles, refinancing|
|Interest Rate||1.74% to 18.00%|
|Fees||May have an application fee or opening fee; down payment may be required|
|Loan Terms||Up to 120 months|
How to Get a Commercial Auto Loan
In order to obtain a commercial auto loan, you must be prepared with not only business documentation but also personal records. The process of securing a loan involves a lot of preparation because you must illustrate your loan needs while assuring the lender that its risk is minimal.
First and foremost, establish the amount of money you have for a down payment, the vehicle you need, and the costs associated with buying the vehicle. Then gather documentation that proves that you are the owner of a business, including business licenses, partnership agreements, and LLC documents. In order to apply under a corporation, you need the articles of incorporation, which must list you as having at least a 20% stake in the company. Other necessary items are your Employer Identification Number (EIN), tax returns, bank statements, and cash flow statements. It is also a good idea to have a loan proposal handy, detailing your business, loan needs, and financial statements.
Many lenders require personal documentation in addition to your business records. This may include your personal credit score and credit history or a personal guarantee, which may be necessary if you have a low business credit score or limited credit history. It reassures the lender that you intend to repay the loan and are committed to your business. Refinancing the vehicle solely under your business is possible after a few years of making timely payments. If you are a sole proprietor and the business is under your Social Security number, you are the borrower and guarantor, meaning that you are personally liable for repaying the loan.
Commercial Auto Loans With Bad Credit
While you can secure a loan despite having bad credit, you’ll pay a price. Lenders will ding you with higher interest rates and severe penalties if you default, and usually require a personal guarantee for the loan. They do this because borrowers who have bad credit often have a history of not paying loans on time or have made multiple unsuccessful loan inquiries. However, if you are able to obtain and repay this type of auto loan, that display of responsibility can help your business’ credit score and history. Generally speaking, we recommend that borrowers evaluate their loan needs while also considering other options to get a vehicle, including leasing or researching local vehicles for sale, provided they have enough cash flow.
Commercial Auto Loans Without a Personal Guarantee
Many business owners try to avoid having to personally guarantee a loan. That’s because if the business is unable to make payments, the lender will go after the owner’s money and assets. But a personal guarantee makes the investment less risky to the lender because it has the reassurance that the loan will be paid. Still, there’s a good chance you can qualify for a commercial car loan without a personal guarantee if you have a high business credit score and you have been in business for a while.
Buying vs. Leasing
While buying a commercial vehicle can make sense for many businesses, leasing is another good option to consider. In the table below, we compare buying and leasing.
|Businesses may qualify for depreciation tax deductions||Leased vehicles may be tax deductible based on vehicle use|
|There are no mileage limits, but vehicles with higher mileage will depreciate faster||There are limits on mileage, and businesses may have to pay more for additional miles|
|Most car loans require a down payment||Some leases don’t require a down payment but require the first month’s payment and a security deposit|
|Business owners can keep the vehicle, sell it to an employee, trade it in, or negotiate a purchase with the dealer||Business owners can decide between buying or turning in the vehicle|
|Vehicles depreciate over time, which brings down their value||Owners can turn in the vehicle and lease a newer or different model|
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