If you work in the home service industry, a vehicle is essential to your work. Your business may require you to be on the road, traveling from one area to another, or it may involve using equipment that needs to be transported to different sites. In any of these cases, a vehicle is essential.
Buying multiple fleet vehicles outright is a huge startup cost, especially if you’re a small business. There are a number of methods to go about small business vehicle financing to ease the burden. One of the most common financing options is to sign up for a business auto loan. Below, we’ve provided a comprehensive guide on the ins and outs of commercial auto loans to help you decide whether it’s the right choice for your business.
Short on time? Skip ahead to what’s most relevant to you and your business:
- What is a commercial auto loan?
- Buying vs. leasing company vehicles
- What are the different types of commercial auto loans?
- Loan rates and terms
- Steps to secure a commercial auto loan
- How to buy a car for your business
- Financing a car through your business
- How to secure the lowest financing rate at a dealership
What is a commercial auto loan?
A business auto loan, also known as a commercial auto loan, is a type of equipment financing that gives you access to cost-effective capital so that you can buy a car or truck. The purchased vehicle then becomes collateral for the loan itself. This setup where the loan becomes collateral if you default makes it easier to acquire without necessitating any personal guarantee requirements.
On the whole, there isn’t much of a difference between a business auto loan and a consumer auto loan. While your rate and terms will differ based on the lender, business auto loans are usually very affordable and most businesses can access them regardless of their size. This is especially important for businesses that require a fleet of vehicles to carry out their service.
Buying vs. leasing company vehicles
Before we jump into more detail regarding the intricacies of business auto loans, it would be beneficial to consider the differences between buying a vehicle and leasing one. Both options have their advantages and your choice between leasing and buying will depend on your priorities. The main difference between the two is that if you lease your vehicle, you will not own it. This means that since the vehicle doesn’t belong to you, you won’t be able to consider it as an asset when calculating the value of your business.
When your lease ends, you will have the option of paying the balance and owning it, or signing another lease to use a different vehicle. Leasing gives you flexibility in case you are hesitant to commit yourself to the vehicle or you’re not sure whether you’ll need it in the long term. Also, leasing provides you the option of obtaining a vehicle for your business when you don’t qualify for a business auto loan.
If you’re looking to keep the car for an extended period of time, getting a business auto loan makes more sense. A business auto loan means that you don’t have to worry about mileage limits. Also, you can find business auto loans that are cheaper than what it would cost to lease in the long run.
On the other hand, signing a lease will allow you to upgrade the car every few years. If the size and style of your car are important to your business then it might be the better option for you. With that said, there are limits to the distances you can drive when leasing a vehicle. If your business requires long trips, leasing may not be the best solution. Also, keep in mind that leasing is often more expensive than getting a business auto loan, particularly if you plan on buying the vehicle once the lease expires.
LEARN MORE: How to track small business mileage
What are the different types of commercial auto loans?
Business vehicles are used for all sorts of reasons like visiting clients, completing in-home jobs, transporting equipment, etc. They are also useful in a variety of service-based fields like electrical, pest control, and delivery. Regardless of their use and industry, business auto loans usually fall into 3 different categories: new commercial vehicle loans, old commercial vehicle loans, and commercial vehicle refinancing.
New and old commercial vehicle loans are self-explanatory. The former is available for the purchase of new vehicles, while the latter is designated for used vehicles. Commercial vehicle financing, however, is when banks offer you a business auto loan for an existing vehicle or take over an existing vehicle loan to provide you with additional financing based on eligibility. This is typically done to reduce the amount of the equated monthly installments. It also frees up some money by refinancing an existing loan at a lower interest rate.
While these options work for many people, it can be difficult to find a business auto financing option if you’re a small business owner with little credit history. If you find yourself having trouble obtaining a small business loan, there are other financing options you can try like equipment financing and short-term loans.
Equipment Financing
If you’re struggling to find a lender, you can apply for equipment financing from an online lender. Equipment loans provide funding to purchase the equipment needed to operate a business. The lender will offer up to 100% of the value of the equipment; however, they may need between 10%-20% down payment for items with a high rate of depreciation, such as vehicles.
Typically some of the best rates you will find for small businesses range between 8% to over 20% and the financing terms range from 1 to 5 years depending on how long the item is useful. With that said, you might find that some lenders require you to have been in business for at least 2 years or more, have annual revenue of $160,000, and have a minimum credit score of 620.
Short-term loan
Another option that’s offered by an alternative lender is short-term financing. This type of loan is available to many small business owners, including those with a low credit score. Short-term loans allow you to receive the funds faster than a traditional commercial auto loan and they can be used for any purpose including purchasing a vehicle for your business.
The terms for these kinds of small business loans can extend to 18 months and require very frequent payments. Lenders sometimes require you to have been in business for at least a year and generate a minimum of $75,000 in yearly revenue. There may also be a minimum required credit score of 540.
Loan rates and terms
Similar to other forms of equipment financing, business auto loans will provide access to the most affordable interest rates because the vehicle you purchase acts as its own collateral. If you have a small business, affordability is probably one of your main priorities. With that in mind, you may want to begin by approaching banks like Wells Fargo. You may be able to secure a loan with Bank of America or Capital One, but a bank like Wells Fargo will offer the lowest-cost options. The specifics of the business auto loans will vary based on the individual program and your business’ qualifications.
Other non-bank lending options include Balboa Capital, Currency Finance, Crest Capital, National Funding, and CIT to name a few. Balboa Capital, for instance, is a great option if you need the funding quickly. Their application is online and they offer same-day funding. CurrencyFinance, on the other hand, is a good option if you need a larger business auto loan. Their loans range from $5,00 up to $500,000. You will need to be in business for a minimum of 2 years, possess a minimum credit score of 625, and make $120,000 in annual revenue.
As a general rule, if you’re accessing funding through a bank, the business auto loan interest rate can fall as low as 3.89%. This is regardless of whether your lender is Bank of America, Wells Fargo, or Capital One. On the other hand, alternative lenders typically have higher interest rates (around 8%) because of the speed with which they provide the funds and their more lax requirements. Of course, business auto loan rates will vary. The basic idea is that if you have better qualifications you will be more likely to get offered business auto loans with a lower interest rate.
Steps to secure a commercial auto loan
Now that you’ve decided that you want to get a business auto loan, what steps do you need to take to secure one? We’ve broken down the process step-by-step:
- Select the vehicle
The logical first step is to find the vehicle you want to purchase. As you’re shopping around, make sure to consider factors like whether or not you need a new vehicle or if a used one will suffice, the condition the car is in, what kind of maintenance it may need, and how much it will cost you to finance it.
- Consider your qualifications
Next, you’ll need to figure out which business auto loan you qualify for. As previously mentioned, business auto loans are much easier to secure than other types of loans because of their self-securing nature. You should be able to qualify for a loan if your credit score is around the 600+ mark, you’ve been in business for over a year, and generate a minimum of $100,000 in revenue.
- Choose and lender and submit your application
As soon as you have a vehicle quote and you’ve run through potential options for business auto loan providers, you’ll be ready to choose a lender. You may want to stick with a lender that you have a pre-existing relationship with or opt for a new provider. The application process will differ depending on the lender, but generally, the processing time for banks is much slower than that of an online lender.
- Review your offer
The final step is to review the offer you are given. Be sure to analyze it thoroughly so that you are aware of all the terms and conditions that you are putting your signature on. Once you’ve made sure that you accept the loan agreement, all that’s left is to sign and receive your funding.
How do I buy a car for my business?
Choosing the right vehicle is one of the most important steps in your decision to buy a car for your business. Then you should consider whether leasing or buying a vehicle makes more sense for the type of work you do. Another important consideration will be your company’s financial position. In other words, how strong is your credit and how high is your annual revenue or income. These are all factors that will come into play as you shop around for different financing or leasing options.
Can I finance a car through my business?
The short answer is: yes; however, the specifics will depend on your region. In the United States, it’s possible to get a business auto loan under your business. Though you can’t get one as a sole proprietor, you can get one as a limited liability company or as a corporation. To go about this you will first need to establish your business’ credit, create a credit profile, and build your business’ credit.
What is the lowest amount a dealership will finance?
Generally speaking, most lenders will not let you finance a vehicle for less than $5000. However, keep in mind that commercial vehicle loans have high borrowing amounts. This means you can get a bigger loan to afford a more expensive vehicle, if need be. Of course, how much you can borrow will depend on many of the factors we previously discussed such as your credit score and annual income.
Business auto loans: a summary
As we’ve seen, the options are vast when it comes to business auto loans and there are options regardless of what stage your business is in. Different business auto loan providers have different requirements, but they are rather lenient in comparison to other kinds of loans. This means that you won’t have much of a problem securing a loan as long as you meet the minimum requirements. As with all loans, remember to do your research and read the fine print before you sign your name on the dotted line.
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