Auto Loans

How to Get a Business Auto Loan

Whether you’re starting your business or expanding it, there are several ways you could secure financing for a commercial vehicle. Business auto loans are the popular way: they work much like consumer auto loans and may offer tax benefits. But it’s not the only path; leasing or taking out a different type of loan might be a better fit for your business.

How business auto loans work

Like a consumer auto loan, a commercial auto loan is a type of secured loan for a new or used light-duty automobile, van or truck. The difference is that it will be primarily used for business purposes, not personal use. In a business auto loan:

The vehicle matters. 

Lenders will look at the age and mileage of the vehicle you want to buy. Bank of America, for example, requires business vehicles to be no more than five years old with less than 75,000 miles.

Business car loans vs. equipment loans

Heavy-duty vehicles that weigh 2.5 tons (5,000 lbs.) or more would be financed using a business equipment loan or commercial truck financing

Vehicle use matters. 

For a vehicle to qualify for a business auto loan, you must use it for business activities. The prospective lender may ask to see where the vehicle you want fits into your business plan. And while it’s understood that work and personal life often merge for small business owners, come tax time, the IRS wants to strictly account for the business use of a car.

The seller might matter. 

Some lenders will only finance a vehicle bought from a certified dealership, not a private owner or a mom-and-pop car lot. 

The buyer(s) matter. 

Even if the vehicle will be owned by the business entity, some lenders still require that business owners sign as guarantors. For example, PNC requires that each owner with a 25% or greater ownership interest in the business must sign the business auto loan contract. 

What is a loan guarantor?

If you sign a personal guaranty, this means that you are responsible for paying off the car loan if the business defaults. If you default as well, your credit will be affected. 

Should I get a commercial auto loan?

As a small business owner, you do take some risk in getting a business auto loan; mainly, you’re betting that the business can pay it back. If the business makes late payments or defaults, it could be looking at late fees, accumulated interest and potentially a repossession, which would hurt your business credit. It could hurt your personal credit as well if you are a loan guarantor. We’ll talk more about alternatives to getting a business auto loan, below.

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How to get a commercial auto loan

Step 1: Find the right vehicle for your business 

If you need to deliver a carful of pastries all over the city, a sedan might be best as they’re usually easy to maneuver and are the least expensive type of vehicle to purchase and operate with great gas mileage. But if your baked goods include 10-tier wedding cakes, a refrigerated van is probably necessary. 

Set a budget

Some lenders finance the entire price of a business vehicle while others may require a down payment, perhaps as much as 20% of the vehicle’s price. A rule of thumb is 100% financing for a new vehicle and 90% for used. In both cases, expect to pay 8% to 10% of the vehicle’s value in taxes and fees out of pocket. Used vehicles can be a great choice for avoiding depreciation, but you’ll want to budget for maintenance and repairs.

Do your research

It’s smart to pick out a vehicle online before you go to the dealership where a salesperson could waste your time and pressure you into a deal before you have a business auto loan offer ready. This gives you time to research the vehicle’s value to know you’re getting a good deal.

Step 2: Gather your documents and check your credit score.

Business auto loan applications are typically paperwork-heavy. But the process could go more smoothly if you have all of your documents gathered in one place. We’ll review the list of documents you’ll need, below. In the meantime, it’s a good idea to check your personal credit score, especially if your business does not qualify for financing without an owner’s guaranty. 

Step 3: Research lenders and apply.

Shop for a car loan much like you shop around for a car. Potential lenders could include your credit union or a national bank. 

Step 4: Choose an offer.

Compare auto loan offers to see which is better for your business. Look at total interest and financing charges as well as monthly payments. An auto loan calculator could help you. 

Step 5: Buy the vehicle.

Go to the dealer with your offer of choice in hand and test-drive the vehicle you want, kick some tires to ensure the car is in good condition. Then make any down payment and finalize the paperwork. 

What documents do you need?

As we mentioned earlier, getting a business auto loan may be quicker and easier if you’ve gathered the right documents before you sit down with a lender.

  • Proof that you represent the business. This can include a business license, articles of incorporation, a business card and/or a formal partnership agreement.
  • Information about the business: The business’s legal name, street address, phone number, email address, type of business, industry code (NAICS), year established, date acquired by the present owner, annual sales or gross revenue, number of employees and the business tax ID or the Social Security number of the owner if it is a sole proprietorship. You could use tax returns, cash flow statements and bank statements to show these things.
  • Information about the business owner(s): Legal names, home addresses, personal phone numbers, personal emails, Social Security numbers, dates of birth, ownership percentages, citizenship, government-issued photo ID may be requested.

Some lenders may require that your business be in operation for at least two years to qualify for any type of business loan. If you don’t meet one lender’s requirements, look for another lender. Not all lenders have the same stipulations.

Where to find a business auto loan

Many national financial institutions offer business auto loans, such as Ally, Bank of America and Navy Federal Credit Union. Credit unions may offer low business auto loan rates – we’ve seen rates as low as 1.98% – but all business owners may have to meet membership requirements. Research the lender of your choice to see if it provides this type of loan and consider building on any existing relationships you may already have regarding business or personal banking. Some banks may require that you have an existing business banking relationship in order to apply online for their business auto loans.

What APR will you get?

Your business auto loan APR will be based on the credit history of the business and/or its owners. In addition, the loan amount, vehicle value and your location all play a role, too. Here are the typical business auto loan rates and terms you could expect.

Loan Amount $5,000 to $250,000
Loan-to-Value Ratio Up to 100% of vehicle value
Uses New and used vehicles, refinancing
Interest Rate 1.74% to 18.00%
Fees May have an application fee or opening fee; down payment may be required
Loan Terms Up to 120 months

Could you get a business auto loan with bad credit?

It could be possible to qualify for a business auto loan if you or your business has limited or bad credit. However, you may pay significantly more in interest and fees and you may have a limited choice of lenders. It could be easier to get a bad-credit business auto loan if you save up a large down payment for the vehicle and start working to improve your business credit.  

What about business auto insurance?

In some instances, your personal auto insurance might be sufficient for some businesses. Check with your insurance provider to see if you need commercial auto insurance. Commercial auto insurance tends to be more expensive than personal auto insurance because liability is higher. 

You can write off your auto insurance premiums – plus gas and maintenance – on your taxes, the entire amount if the vehicle is only used for business purposes, or a partial amount if you use it for personal and business use. You can see more here about when car insurance is tax-deductible

Business auto loan alternatives

You don’t necessarily need an auto loan to get a car for your business. As discussed earlier, there are risks you may want to avoid: tapping your rainy-day fund to cover the down payment, for example, or tying up available credit, preventing you from being approved for another type of business loan. A business budgeting template could help you make these decisions. 

There are alternatives, namely leasing, that may better suit your business. 

Business auto leasing

The biggest advantages of leasing include typically lower monthly payments and the fact that you can turn in the vehicle at the end of the lease and get a new one. But you’ll want to weigh the tax benefits of buying versus leasing with your accountant or tax advisor. Here’s a closer look at what else you’ll want to consider

Business Auto Loans Vs. Leasing
Buying Leasing
  1. Equity. At the end of the loan, you may keep, sell or trade in the vehicle. 
  2. No modification limits. If you need to modify the vehicle to better suit your business purposes, go ahead, you own it. 
  3. No limits on mileage or wear and tear. You can drive an unlimited amount of miles and not fuss over scratches. 
  4. Tax breaks. You may be able to write off depreciation and other ownership costs on your income taxes.
  5. No extra insurance. Leases can require a higher level of insurance coverage. 
  1. Lower payments. Leases tend to offer lower monthly payments than purchase loans. 
  2. Sales tax spread out: You need to pay sales tax for a leased car, but you may not pay it all at once, as you do when you buy a car. In many states, the taxes charged on a leased car are spread out in the monthly payments.
  3. Warranty coverage. Most leases don’t go over the manufacturer-provided warranty coverage period. So you shouldn’t have to make a car repair bill while you’re making lease payments.
  4. Tax breaks. You may be able to write off certain costs of leasing, such as the lease cost or the standard IRS mileage rate.

Whether you buy, lease or use another type of loan, it could still be possible to deduct business use of the vehicle on your taxes. You can see more here on tax deductions for cars

Small business loan

A secured small business loan could be a possible alternative. In this case, the business would still be the owner of the vehicle, although the lender may require that the business owner sign as a loan guarantor as well. You can see more here on the requirements of a small business loan and how to get a small business loan

Consumer loans

A consumer loan might be a better way to obtain a vehicle for business use, especially if you plan to also use it for personal purposes. Keep in mind that you, not your company, are personally responsible for a consumer loan. 

  • Consumer auto loan. This may be a good fit for someone who plans to use a vehicle primarily for personal use but some business as well. 
  • Home equity loan. Using real estate as collateral could mean low rates, but it also puts your home at risk if you default.
  • Home equity line of credit (HELOC). If you will need to make multiple large purchases for personal or business use, a home equity line of credit could help.
  • Personal loan. An unsecured personal loan doesn’t put any assets on the line but may have a higher interest rate.
 

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