Buying a commercial vehicle provides its own benefits for your small business. It also can be a better option to build equity and take advantage of tax benefits. However, it can be difficult to pool resources when purchasing a business vehicle outright.
Fortunately, there are 2 main commercial vehicle financing options that can help you build your business. We’ll review both choices for a commercial auto loan, take a look at the terms and the pros and cons of each to help you decide which option is best for your business.
What’s a Commercial Vehicle Loan?
A commercial vehicle loan is financing that’s used specifically to purchase vehicles for your business.
One of the major benefits of using a commercial car loan is that you don’t have to use your company’s cash reserves to pay for the entire vehicle upfront.
Similar to personal vehicle financing, you’re required to pay back the commercial vehicle loan in monthly installments of the principal amount, with added interest over the term of the loan. Commercial auto loan terms typically are about 5 years, but can vary depending on your qualifications.
Will 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 of your business car loan within the agreed term, the car’s title will be transferred to you. After that, you’ll have full ownership of the vehicle. You can continue using it for your business, trade it for another vehicle or sell it.
If you’re considering a commercial car loan, it’s important to note if you plan on keeping the vehicle for a long time, it can be resold 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.
Other Types of Commercial Vehicle Financing
Commercial vehicles have rapid depreciation rates, sometimes dropping about 20% in value in the first 12 months after purchase. This makes leasing a popular method of financing for businesses that want to frequently update or replace vehicles. It’s like renting a vehicle but for a prolonged period of time. Another benefit of leasing is that the lender doesn’t always require 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.
A limiting factor when choosing a lease is that it’s for a set amount of time, and only a certain number of miles can be driven each 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 has 2 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 so choose.
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 usually want to see:
- Business licenses
- Partnership agreements
- Profit-loss statements
- LLC documents
- Federal employer identification number (EIN)
- 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 for a business car loan. You should approach lenders with a loan proposal that details business activities, what the commercial vehicle financing 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.
Commercial Vehicle Loan Rates and Terms
The commercial auto financing amount that your business can borrow will depend on your financial situation. The majority of lenders will afford you up to 100% of the vehicle’s value.
As with most forms of credit, the best commercial auto loan rates and terms are usually reserved for borrowers with strong credit histories and a proven track record of financial responsibility.
The terms of your commercial auto loan typically range from 1 year-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.
If you have a good credit score, you’re likely to be offered a lower commercial vehicle loan interest rate. Lenders can provide commercial vehicle financing for business owners with a poor credit history, but they could be stung with higher commercial auto loan rates.
It’s important to note that a loan backed by the Small Business Administration (SBA), owners with at least a 20% stake in the business are required to sign a personal guarantee, whereby the signee becomes liable for the outstanding debt if the business is unable to continue payments on the business auto loan.
In addition, if you’re struggling with a low business or personal credit score, you’ll most likely be asked to sign a personal guarantee.
There might be an application fee or down payment, depending on the lender you choose. If your business is required to put forward a down payment, you can expect to pay 10% of the vehicle’s cost (15% for a commercial truck loan).
Getting a Commercial Vehicle Loan with Bad Credit
If you’re a small business owner with a poor or scant credit history, you still have options to secure commercial auto financing.
Online — or alternative — lenders offer financing options for small to mid-sized businesses that can’t obtain funding from traditional sources, such as a bank or credit union.
If you’re a business owner struggling to get commercial vehicle financing, you could apply for equipment financing from an online lender.
Regarding Equipment Financing
Equipment financing provides funding to buy or lease equipment you need to operate your business. Lenders can provide up to 100% of the value of the equipment, but might require a 10%-20% down payment for items that have a high rate of depreciation, including commercial vehicles.
Rates can start at 8%, and the financing term can run from 1 year-5 years, depending on the useful life of the equipment.
To qualify for equipment financing, some lenders require you’ve been in business for 2 years or more, have an annual revenue of at least $160,000 and have a credit score of 620 or better.
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 business vehicle loans and vehicles before you secure financing. Whether you have a solid 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.