Whether you’re a startup that’s looking to take flight or trying to scale a multi-million dollar business, there are a number of factors to consider when trying to branch out and build. From buying new equipment to commercial vehicles, you’re often faced with the challenge of finding the cash to help you scale and grow your company.

Buying a vehicle provides its own benefits and it’s a better option to build equity and take advantage of tax benefits. The only problem is, it can be difficult to pool together resources when purchasing a business vehicle outright.

Fortunately, there are a couple of ways that can help. Let’s delve deeper into the two main financing options to help you understand which one is the most suitable for you. There are pros and cons of leasing and commercial vehicle financing, and it’s important to do your own research before choosing one.

What’s a Commercial Vehicle Loan?

Sometimes businesses need a little working capital to increase fluidity with their cash flow. A commercial vehicle loan is a method of financing that is specifically used to purchase vehicles for your business. Whether you need cars for your salespeople or employee commuter vehicles, they help your business get from A to B, literally.

Maybe you need to pump money into your marketing campaigns or hire a new employee or two. It’s good practice to have working capital on hand to manage your business. One of the major benefits of using a commercial vehicle loan is that you don’t have to pay for the entirety of the vehicle upfront, with your own money. The lender provides you with the cash for a set term. This way, you’re not depleting your cash reserves, leaving you with enough working capital to address other business activities.

Similar to personal vehicle financing, you’re required to pay back monthly installments of the principal amount, with added interest over the term of the loan. Loan terms are usually around 5 years but can vary depending on your qualifications.

To put it into perspective, your restaurant has just started to take online orders and you need vehicles to deliver food across the city. It’s useful to take out commercial vehicle financing and purchase delivery vehicles to help grow your online orders without wiping out your bank account in the process.

Do I Own the Commercial Vehicle?

The lender of your commercial vehicle financing will be listed as a lienholder on the title of the vehicle you purchased. If you miss payments and happen to go into default, the lender has the right to repossess the vehicle.

Once you clear the entire balance of the borrowed amount within the agreed term, the title of the vehicle will be transferred to you. You’ll have full ownership of the vehicle and can carry on using it for your business, trade it for another vehicle or sell it.

If you’re considering a commercial vehicle loan, it’s important to note that if you plan on keeping the vehicle for a long time, it can be re-sold when it’s no longer required and you may be able to write off the depreciation on your tax returns. Furthermore, there are no mileage limits, you can drive your vehicle to where you want, for as long as you want.

Are There Other Types of Commercial Vehicle Financing?

Due to a vehicle’s rapid depreciation rates, it can drop by around 20 percent after the first 12 months. This makes leasing a popular method of financing for businesses that want to update or replace vehicles frequently. It’s like renting a vehicle but for a prolonged period of time. Another added benefit of leasing is that the lender doesn’t always require you to put forward a down payment.

When taking out a lease, you’re required to make monthly payments of a set amount on the vehicle that you’re borrowing, and you’re required to keep the vehicle spick and span.

A limiting factor when choosing a lease is that it’s for a set amount of time, and only a certain amount of miles can be driven, per year. This can be a total deal breaker if you’re often required to travel long distances for work, and you’re limited to the number of miles you can use. Additional miles can often be bought at your expense.

When the lease is up, the lessee is given two options: they can purchase the vehicle by paying off the balance of the lease or they can return it. After returning a leased vehicle, the lessee may lease another, if they choose to do so.

How Do I Get a Commercial Vehicle Loan?

Preparation is key when trying to secure your business a commercial auto loan. Be prepared to show business and personal documents. Lenders will want to see:

  • Business licenses
  • Partnership agreements
  • Profit/loss statements
  • LLC documents
  • Federal Employer Identification Number
  • Tax returns
  • Bank statements
  • Cash flow statements
  • Driver’s License

Lenders will perform a risk assessment to make sure that you have the qualifications to fit their lending criteria. It would be wise to approach lenders with a loan proposal that details business activities, what the loan will be used for and any additional financial statements.

In addition to business documentation, many lenders will want to review your personal credit and finances. Don’t take it personally, they just want a little reassurance that you’ll be able to keep up with repayments.

Typical Commercial Vehicle Loan Rates and Terms

Let’s get down to the question on every borrower’s mind—what will I be paying back? Like most forms of credit, the best interest rates and terms are usually reserved for borrowers with strong credit histories and a proven track record of being able to manage their finances.

The amount that your business can borrow will depend entirely on your financial situation. The majority of lenders will afford you up to 100 percent of the vehicle’s value.

If you’ve got a good credit score, you’re likely to be offered one of the lower rates, which could be as little as 3 percent. For business owners with a poor credit history, you’re not at a complete loss. Lenders will often provide commercial vehicle financing, but you could be stung with rates as high as 18 percent or more.

It’s important to note that with the majority of commercial vehicle finance policies, owners with at least a 20 percent stake in the business may be required to sign a Personal Guarantee. A Personal Guarantee is a signed agreement, where the signee becomes liable for the outstanding debt if the business is unable to continue payments on their loan.

In addition, if you’re struggling with a low business or personal credit score, you’ll most likely be requested to sign a Personal Guarantee.

There may be an application fee or down payment, depending on the lender that you choose. If your business is required to put forward a down payment, you can expect to pay 10 percent of the vehicle’s cost (15 percent for a commercial truck loan).

The terms of your commercial auto loan typically range from 1-5 years, allowing you to make weekly or monthly payments, subject to the length of the loan and your business’s ability to pay it back.

The Bottom Line

Finding the right commercial vehicle financing for you will take time, research and planning. It’s a good idea to shop around for the best deal on loans and vehicles before you jump into anything. Whether you have a stellar credit history or have struggled in the past, the good news is that most lenders will be able to help you reach your business goals and needs.