Business Auto Loans: Rates, Terms & Where To Find Them
From equipment to commercial real estate, it takes many resources to run a successful business. For many businesses, vehicles are another vital part of their 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. A lack of capital is an even bigger problem when a business needs to purchase multiple vehicles. The solution: obtain a business auto loan. Read on to find out more about the different types of business auto loans, why you should consider a loan, and what to expect during the loan process.
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What Are Business Auto Loans?
Business auto loans, or commercial auto loans, are a type of financing used to purchase vehicles for business purposes. A business auto loan provides business owners with the money needed 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 upfront 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 long period. A loan 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. The process works just as it would for a personal auto loan, only it is more tailored to businesses.
Businesses that need vehicles for any purpose can obtain a business car loan. 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 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. A business owner needs to understand the differences between the two before starting the application process.
Commercial vehicle loans are used to pay for the vehicle over time (typically five years, though terms can be longer or shorter). The borrower pays a set amount each month for the entire length of the term. This payment applies to the loan’s principal amount as well as interest paid to the lender for advancing the money.
During the repayment process, the vehicle’s title will list the lender as a lienholder. That gives the lender the right to repossess the vehicle if the borrower goes into default. However, once the borrower has paid the balance in full, the lender will no longer be a lienholder. The title then goes to the borrower, giving them full ownership of the car. They 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, such as three years; during that time, the lessee can only drive the car for a set number of miles per year. The vehicle 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 more extended period. Making payments toward eventually owning the vehicle is typically the best option for businesses that aren’t concerned about having the latest and greatest cars.
Auto loans are also a better choice for businesses that will rack up a lot of mileage. Leases typically restrict the number of miles driven annually. Business owners that travel extensively in their leased vehicle could end up paying $0.10 to $0.20 per additional mile — costs that 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 of dollars 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 than a loan. Down payments are often much cheaper for a lease, and reduced monthly payments are also possible. For short-term use, this may be ideal for business owners. At the end of a lease, the business can purchase the car for a large lump sum payment. If the business doesn’t have the money, there’s the option of signing another lease for a different vehicle. However, this will start the cycle all over again. Repeatedly entering into leases 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 needs to prove they can make the monthly payments on the loan or lease by submitting documents such as 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 based on the age of the vehicle, its mileage, and its value when buying a pre-owned vehicle.
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. That’s because lenders consider applicants with bad credit to be a higher risk.
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 defaulted loan. Defaulting on a loan would result in another hit to credit scores, 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
Lenders reserve their best commercial auto rates 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 five-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 lender’s policies.
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, lenders require a 15% down payment on a commercial truck loan, but down payments may be as high as 25% of the total cost of the truck. In some cases, a lender may lower the required amount of the down payment, or they might not require a down payment at all. However, 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. That means all of those 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 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 a no down payment option for the most qualified buyers. However, before accepting this offer, it’s crucial 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. That’s because the loan payment may be “upside down,” which means that there’s more money owed on the vehicle than what it is worth. Entering into a loan with no down payment increases the odds of the loan being upside down.
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, 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 decided 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 incredibly competitive. Though these loans can be challenging to obtain, they often come with great interest rates and repayment terms. While there isn’t a specific SBA commercial vehicle loan program, there are several loan programs that can be used toward the purchase of a commercial vehicle.
The 7(a) program, for example, offers up to $5 million for most business expenses, 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 nonprofit intermediary lenders.
Interest rates and terms are kept low due to the SBA’s program standards. The government also backs SBA-approved loans, so intermediary lenders are more willing to work with small businesses, even providing options for new businesses that have been in operation for under two years.
One potential drawback is that, except with the SBA’s Express Loans, approval can take a long time. These loans are also typically reserved for business owners with higher credit scores that are at least in the high-600s. Think an SBA loan sounds right for your business? Read on to learn 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. A down payment on the vehicle can reduce this percentage. 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 a credit score of at least 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 for 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 operation. 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 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, the cost of the loan is outweighed by a high return on the investment.
With so many alternative lenders offering loans, it’s hard to decide which is best. 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. It’s easy to want to rush the process and accept the first loan offered. However, it’s vital for a business owner to fully evaluate the needs of the business and the loan’s overall cost.
The interest rates and requirements of business auto loan lenders should be fully understood before you sign on the dotted line. When considering 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.
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