Business Auto Loans: Rates, Terms And Where To Find Them

From equipment to commercial real estate, it takes many resources to successfully run a business. For many businesses, vehicles are just another important part of operations. Whether it’s to deliver products to customers, drive sales, or to commute from one location to another, many businesses need reliable, dependable vehicles.

However, most small businesses don’t have the capital to purchase a vehicle with cash. This becomes an even bigger problem when multiple vehicles need to be purchased. In these situations, there is a solution: obtaining a business auto loan. Read on to find out more about the types of business auto loans, why you should consider a loan, and what to expect during the loan process.

What Are Business Auto Loans?

Business auto loans, or commercial auto loans, are a type of financing used to purchase vehicles used for business purposes. A business auto loan provides business owners with money that can be used to buy a vehicle from a dealership or private seller.

The advantage of commercial vehicle loans is that the business does not have to pay the full purchase price up front in order to take possession of the vehicle. Instead, the lender provides the needed funding, allowing the business owner to pay the total loan amount, plus interest and fees, over a longer period of time.

This is extremely beneficial for business owners, as they won’t have to pay tens of thousands of dollars out of pocket. Instead, they will have more manageable monthly payments while being allowed to use the vehicle. Essentially, the process works exactly as it would for a personal auto loan, only it is more tailored to businesses.

Business car loans can be obtained by businesses that need vehicles for any purpose. Whether it’s for delivery vehicles, commuter vehicles for employees, or vehicles to be used by salespeople, a business can receive one or even multiple loans in order to fund these purchases.

Commercial Auto Loans VS Leases

When evaluating funding options for business vehicles, there are two major options to consider: commercial auto loans and commercial auto leases. It’s important for a business owner to understand the differences between the two before starting the application process.

Commercial vehicle loans are used to pay for the vehicle over a period of time (typically 5 years, though terms can be longer or shorter). The borrower pays a set payment each month for the entire length of the term. This loan payment applies to both the principal amount that was loaned, as well as the interest paid to the lender for advancing the money.

While payments are being made, the lender will be listed as a lienholder on the title of the vehicle. This gives the lender the right to repossess the vehicle if the borrower goes into default. However, once the balance is paid in full, the lender will no longer be a lienholder. The title will be given to the borrower, who will then have full ownership of the car and can continue to use the vehicle, trade it in for another vehicle, or sell it outright.

The other type of financing is leasing. Leasing is more like a long-term rental. A lessee (in this case, the business owner) agrees to make monthly payments on the vehicle. The lease period will be for a set period of time, such as 3 years; during that time, a set number of miles per year can be driven. The car must be well-taken care of and not damaged while in use.

At the end of the lease period, the business owner has two options: they can pay off the balance of the lease and own the vehicle, or they can return it. When business owners return leased vehicles, they have the option to enter into another lease for a newer vehicle. Through a lease, the business owner will never own the car unless the vehicle is paid for with cash at the end of the lease period.

When Should I Get An Auto Loan?

An auto loan is a great choice for businesses that want to keep the vehicle for a longer period of time. Making payments to eventually own the vehicle is typically the best option for businesses that aren’t concerned about having the latest and greatest cars.

Auto loans are also the better choice for businesses that will rack up a lot of mileage. Since a lease restricts the number of miles driven annually, business owners that travel extensively in their leased vehicle could end up paying 10 to 20 cents per additional mile – costs that really rack up through the year.

A commercial auto loan may be the best choice for anyone that has a higher risk of damaging the car. Damage to the interior or exterior of the vehicle would result in wear-and-tear fees, which could add hundreds to the cost of a leased vehicle.

When Should I Get An Auto Lease?

A commercial auto lease may be the wiser choice for businesses that want to upgrade every few years to a newer model. If the car is taken care of and not driven too many miles each year, a lease could be a financially-sound decision.

A lease is also less expensive in the short-term. Down payments are often much cheaper for a lease, while monthly payments may be reduced as well. For short-term use, this may be ideal for business owners. At the end of a lease, the car can be purchased for a large lump sum payment. If the business doesn’t have the money, another lease can be signed for a different vehicle. However, this will start the cycle all over again; entering into leases repeatedly is ill-advised as it will result in thousands of dollars in payments without ever actually owning the car.

Business Auto Loan Borrower Requirements

While business car loan requirements vary by lender, an applicant should expect to gather similar documentation regardless of the chosen lender. Business and personal documentation are required to receive a business auto loan. Items such as business licenses and articles of incorporation will be required to prove ownership of the business. A federal Employer Identification Number will also be needed for the application. Sole proprietors without an EIN will be required to submit their Social Security numbers.

The borrower will need to prove that they are able to make the monthly payments on the loan or lease by submitting documents like tax returns, cash flow statements, and bank statements.

Business credit history will be considered during the loan process. In most cases, the personal credit history and score of the applicant will also be evaluated.

It’s important to note that there may be limitations on the financed vehicle if the business plans to save money by purchasing a used car. The borrower may be limited on the age of the vehicle, the mileage, and the value of the vehicle when purchasing a pre-owned car.

Can I Get A Business Auto Loan If I Have Bad Credit?

Business auto lenders will evaluate the credit score of the business. If the score is bad or limited, personal credit will be considered. But what happens if the applicant has a low credit score?

Commercial vehicle loans for bad credit do exist. However, business owners with poor credit should expect to receive higher commercial vehicle loan rates, which will increase the monthly payment amount. Higher down payments may also be required for borrowers with low credit scores. This is because an applicant with bad credit is seen as a higher risk to the lender.

Business owners with poor credit scores should evaluate the affordability of the loan. Acquiring a commercial vehicle will not only result in a monthly loan payment but also other expenses, including property taxes, insurance premiums, gas expenses, and maintenance and repair costs. High monthly payments could prove to be too much for a small business, leading to a default on the loan. This would result in another hit to credit scores, as well as repossession of the vehicle and possible legal action by the lender. In most cases, it makes more sense for a business owner to at least get their personal credit in order before accepting an auto loan.

Business Auto Loan Interest Rates & Terms

The best commercial auto loan rates are reserved for borrowers with the strongest credit histories and proven track records of cash flow. Currently, rates for the most qualified borrowers are under 3%. This rate could go as high as 18% or more for borrowers with poor credit scores or startup businesses. On average, most borrowers receive a rate of just over 4% over a 5-year repayment term.

Business owners who choose to refinance their loans in the future can save on payments with interest rates starting at 2.99%. Refinancing is a great option for small business owners that have high-interest loans and would like to reduce their monthly payments after building a positive credit history.

On average, business owners should expect to put 10% of the total vehicle cost toward the down payment. Maximum terms vary, but 60 months is a typical repayment term for most auto loans. However, this term may be longer or shorter depending on the policies of the lender.

Commercial truck loan rates may be different than for commercial vehicle loans. If a commercial truck is needed, a business owner will need to inquire as to the rates on these heavy-duty vehicles. Currently, interest rates for the most qualified borrowers are below 5%. On average, a 15% down payment on a commercial truck loan is required, but down payments may be as high as 25% of the total cost of the truck. In some cases, a lower down payment or even no down payment may be required, but this would only be available to applicants with strong credit histories and cash flow.

Can I Get A Business Auto Loan Without Signing A Personal Guarantee?

With most business auto loans, all owners with at least a 20% stake in the business are required to sign a personal guarantee. This means that all owners will be held personally liable for the debt. This is almost always the case for applicants with low business or personal credit scores.

Businesses with high credit scores may qualify for business auto loans without personal guarantees. This policy varies by lender and is typically reserved for applicants with the best credit scores. In some cases, a business auto loan refinance is possible after multiple payments have been made on time. During the refinance process, it is possible to put the loan solely under the name of the business without a personal guarantee.

Can I Get a Business Auto Loan Without Making A Down Payment?

Some lenders may offer no down payment options for the most qualified buyers. However, before accepting this offer, it’s important to think about the potential drawbacks.

Financing a vehicle with no down payment will result in higher monthly payments. Also, if the business wants to sell or trade in the vehicle during the life of the loan, they may be unable to do so without putting their own money into the transaction. This is because the loan payment may be “upside down,” which means that more money is owed on the vehicle than what it is actually worth. Entering into a loan with no down payment increases the odds of being upside down on the loan.

If the business doesn’t have the funds to pay a down payment, there are several options available. The first is to wait until there is enough money to make a sizable down payment of at least 10% of the total cost of the vehicle. If a car is needed immediately, other options can be explored, such as taking out a business car lease, which often has lower down payment requirements. Vehicles that are owned by the business and will no longer be in use can also be traded in at a dealership. Financed vehicles may be traded in toward the purchase of a new vehicle as long as there is equity.

Where To Get Business Auto Loans

Once a business has made the decision to move forward with a commercial auto loan, it’s time to begin the application process. The first step is to find a reputable lender to work with. While it is possible to go to an auto dealership to obtain a commercial vehicle loan, this usually results in multiple inquiries on a credit report, which can lower a credit score. Instead, business owners should shop around on their own and have funding in place before making the purchase. There are several options available.

The Small Business Administration (SBA)

Smart small business owners know that loans through Small Business Administration programs are extremely competitive. Though these loans can be difficult to obtain, they often come with great interest rates and repayment terms. While there isn’t a specific SBA commercial vehicle loans program, there are several programs available that provide loans that can be used toward the purchase of a commercial vehicle.

The 7(a) program, for example, offers up to $5 million for almost any business expense, including the purchase of equipment and vehicles. The SBA Express loan program is another option, providing up to $350,000 in funding and a guaranteed approval decision within 36 hours. These loans are obtained through intermediary partners of the SBA, including banks and credit unions.

SBA Microloans are another program to consider for smaller funding needs. If the vehicle to be purchased costs less than $50,000, this may be an option. These loans can be received through SBA-approved non-profit intermediary lenders.

Interest rates and terms are kept low due to the SBA’s program standards. SBA-approved loans are also backed by the government, so intermediary lenders are more willing to work with small businesses, even providing options for new businesses that have been in operations for under 2 years.

One potential drawback is that, with the exception of Express Loans, approval for these loans can take a long period of time. These loans are also reserved for business owners with higher credit scores at least in the high-600s. Think an SBA loan sounds right for your business? Read on to learn more about more about the pros and cons of SBA loans.

Banks & Credit Unions

Most banks and credit unions offer commercial vehicle loan options. Getting a commercial vehicle business loan from a financial institution is much the same as getting a personal auto loan. An application is filled out and documentation is required, including proof of ownership of the business and proof of cash flow.

Banks and credit unions will calculate a Loan-to-Value ratio. This equation involves dividing the total dollar value of the loan by the actual cash value of the vehicle. This percentage can be reduced with the down payment made toward the vehicle. Most banks and credit unions have limitations on the LTV of a financed vehicle, which varies by lender.
When applying for an auto loan through a bank or credit union, business and personal credit will be considered.

Interest rates and terms will be reliant on the applicant’s credit history. Applicants should have at least a credit score of 650 before applying. Lower scores may be accepted but will come at an increased cost. Commercial vehicle finance rates vary by lender; these loans can be approved more quickly than SBA loans but for larger amounts or more complicated credit situations, the process from application to funding can take several weeks or longer.

Most businesses opt to work with the financial institutions with which they have existing relationships. However, business owners that want to shop the best rates should read on to find out more about the banks with the best rates on business loans.

Alternative Lenders

Alternative lenders can be considered when a business doesn’t have a high credit score or a long time in operations. These lenders focus less on credit scores and the length of time in business and more on incoming cash flow. Typically, applications can be filled out online and the loans are funded in a short period of time.

However, there are drawbacks to working with alternative lenders. Typically, business auto loan rates and fees are much higher through these lenders. The overall cost of the loan may be much higher than it would be with a bank, credit union, or an SBA-approved lender. However, if obtaining the auto loan will benefit the business by improving operations and cash flow, this is a high return on investment that outweighs the cost of the loan.

With so many alternative lenders offering loans, it’s hard to decide which is best for business. Check out the top small business lenders that can help you purchase your next commercial vehicle.

Final Thoughts

There comes a time for many businesses when the purchase of a commercial vehicle is necessary. While it’s easy to want to rush the process and accept the first loan offer available, it’s important for a business owner to fully evaluate the needs of the business, as well as the overall cost of the loan.

Interest rates and requirements of business auto loans lenders should be fully understood before you sign on the dotted line. When applying for and accepting a commercial auto loan, the smart business owner will make a careful, calculated decision that will boost the business, not draw it deep into debt.