What is a Commercial Auto Loan? How Can You Get One?

What is a Commercial Auto Loan? How Can You Get One?

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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

Commercial auto loans are used by businesses to buy vehicles needed for work-related operations, such as visiting clients, completing jobs and transporting equipment, 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 far more documentation is required. These loans are available for new and used vehicles, as well as for refinancing existing loans. You can use a commercial vehicle loan to purchase a vehicle for personal and business use, but be sure to factor only business-related costs when claiming your vehicle as a business expense.

What to look for in a commercial auto loan

When considering commercial auto loan lenders, focus on down payment requirements (if any), interest rates and the repayment term. Many lenders will cover up to 100% of the cost of a new vehicle, and we’ve seen business auto loan rates as low as 2.49% APR. But this may not be the case for used vehicles — many times lenders won’t finance cars and trucks that are five years or older. That’s because vehicles are considered depreciating assets and can be risky to finance as well as expensive to buy, which is why many businesses choose to lease instead. Still, 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.

Commercial truck loans

Commercial truck loans are used to finance transportation vehicles (semi-trucks) or vocational trucks (dump trucks, cement trucks and other work vehicles) commonly used in industries like construction, delivery, waste and farming. Truck financing is available through alternative lenders and large national banks — smaller banks don’t typically offer this type of financing. Repayment terms can extend up to 10 years with interest rates ranging from 5% to 30%.

Similar to business car loans, the truck serves as collateral. Despite the loan being secured, lenders can still be hesitant to offer truck financing due to high business failure rates and costly ongoing expenses related to oil changes, fuel, repairs and maintenance. Other risk factors include:

  • Being a new business
  • Having poor credit
  • Having low cash reserves
  • 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%.

Commercial truck loans vs. equipment loans

Some lenders finance large commercial vehicles using equipment financing. You may find lower rates, but possibly face fees and shorter terms.

Typical commercial auto loan rates and terms

In the chart below, we show the typical terms, features, and rates associated with commercial auto loans.

Loan Amount
$5,000 to $500,000
Loan-to-Value RatioUp to 100% of vehicle value
UsesNew and used vehicles, refinancing
Interest Rate2.49% to 30%
FeesMay have an application fee or opening fee; down payment may be required
Loan TermsUp to 120 months

How to get a commercial auto loan

To obtain a commercial auto loan, you must collect both your business documentation and personal records. The process of securing a loan involves a lot of preparation, as you’ll have to illustrate your loan needs while assuring the lender that its risk is minimal.

1. Choose a vehicle and lender

The vehicle you need would depend on your business — for instance, a cake delivery company may require a refrigerated van, while a food truck business may need a truck that accommodates ovens. Keep your cash reserves in mind, too: The price or age of the vehicle may affect the size of your down payment (if the lender requires one), and the more expensive or older the vehicle, the larger the down payment might be.

2. Gather loan documents

You may need to prove that you’re the owner of a business with copies of business licenses, partnership agreements and limited liability company (LLC) or corporation documents. Depending on the lender, owners that hold at least a 20% stake in the business may need to sign and submit personal financial statements, including personal credit score and credit history, to provide some reassurance that the loan will be repaid. It’s also a good idea to have a loan proposal handy, detailing your business, loan needs and financial statements.

You may also need to provide your company’s:

  • Employer Identification Number (EIN)
  • Tax returns
  • Bank statements
  • Cash flow statements

If you’re looking to refinance an existing vehicle under a commercial loan, the lender will assess the vehicle information, your business and your background. If you’re a sole proprietor and the business is under your Social Security number, you’re both the borrower and the guarantor, meaning that you’re personally liable for repaying the loan.

3. Research lenders and apply

Commercial auto loans are available through both traditional financial institutions and alternative lenders. There are lending products specifically for financing commercial vehicles, but some lenders may offer vehicle financing through equipment loans. You should also keep in mind that a lender may only finance used vehicles that meet certain mileage or age requirements.

Commercial auto loans with bad credit

While you can secure a loan despite having bad credit, you’ll often pay higher interest rates. Lenders may also require a personal guarantee, a provision that holds you personally liable for repaying the loan. They do this because bad credit typically signifies a history of not paying loans on time or multiple unsuccessful loan inquiries — a personal guarantee reduces this risk.

Generally speaking, we recommend that borrowers evaluate their loan needs while also considering other commercial vehicle finance options, such as leasing. If you have enough cash reserves, purchasing a new or used vehicle outright can help you avoid high APRs typically associated with having low or no credit.

Commercial auto loans without a personal guarantee

Many business owners try to avoid having to personally guarantee a small business loan. That’s because if the business is unable to make payments, the lender will go after the owner’s money and assets. Still, there’s a good chance you can qualify for a commercial auto loan without a personal guarantee if you have a high business credit score and you've been in business for a while.

Buying vs. leasing

While buying a vehicle for a small business has its advantages and can make sense for many businesses, leasing is also worth considering. In the table below, we compare these options.

Purchasing a vehicle may require a down paymentLeasing a vehicle may not require a down payment, but you may have to pay the first month’s payment or a security deposit upfront
There are no mileage limits, but vehicles with higher mileage will depreciate fasterThere are limits on mileage, and businesses may have to pay more for additional miles
Business owners can keep the vehicle, sell it to an employee, trade it in or negotiate a purchase with the dealerBusiness owners can decide between buying or turning in the vehicle
Generally longer repayment terms and higher paymentsGenerally shorter monthly terms and lower monthly payments
Vehicles depreciate over time, which brings down their valueOwners can turn in the vehicle and lease a newer or different model
Businesses may qualify for depreciation tax deductionsLeased vehicles may be tax-deductible based on mileage or actual expenses

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