Gear Up for Commercial Vehicle Financing

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How to Finance a Commercial Vehicle

There are many reasons to purchase a vehicle for business purposes. Commercial vehicles include dump trucks, agricultural equipment, town cars and box vans, to name a few. The range of vehicles is vast, but so are the financing options.

Financing a commercial vehicle is more complex than getting a standard auto loan. Although most commercial vehicle loans are secured by the vehicle itself, the type of vehicle you need as well as your business and personal finances affect your loan eligibility and conditions. Comparing lenders and getting preapproved for a loan is an essential starting point once you determine you need a vehicle for your business.

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Loan Amount

Light Vehicle: $10,000 to $250,000; Heavy Equipment: $25,000 to $10 million

Minimum Time in Business

Typically 2 years

Loan Term

1 to 10 years

Commercial Vehicle Features

The type of commercial vehicle determines the type of loan you can obtain.

Vehicle Type

Lenders categorize commercial vehicles as automobiles, vocational vehicles and transportation vehicles. Automobiles include company cars, taxi cabs and delivery vans. Vocational vehicles are used to perform specific work for specialized industries, such as equipment used on construction or agricultural jobs.

Transportation vehicles include long-haul transport trucks such as semi-trucks, 18-wheelers and tractor trailers. Many lenders view transport vehicles as higher risk compared to vocational vehicles because of their transient nature.

Vehicle Weight

Vehicles weighing less than 2 tons are often eligible for commercial vehicle loans structured more like auto loans and with shorter terms. Commercial vehicles heavier than 2 tons are generally financed through longer-term equipment loans.

New or Used

Buying new ensures that the vehicle is in optimal condition, and it often comes with a warranty. New is often more expensive than a used vehicle. Depending on the vehicle, buying used can be cost-effective, particularly when dealing with heavy-duty equipment built to endure the wear. Loans for used vehicles — both standard automobiles and heavy-duty vehicles — tend to have higher interest rates and shorter available terms.

Requirements for Owner-Operators

Owner-operators, or independent drivers, are considered higher risk and face stricter eligibility requirements when financing a commercial vehicle. Many lenders require owner-operators to demonstrate a required minimum time in business and at least five years with a commercial driver’s license.

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Qualification Factors

Although loan eligibility requirements vary from one lender to another, you may be assessed on factors that include your business and personal credit history. Typically lenders consider the following factors.

  • Demonstrated proof of business.
  • At least 2 years in business. Start-up business owners may be required to personally guarantee the loan.
  • Business credit, cash reserves, annual net profit and debt.
  • Personal credit, typically at least 660.
  • Personal annual income of each business owner.

Incorporation Required

When possible, put the title in the company’s name. Commercial vehicles can be purchased in the name of companies that are structured as limited liability corporations (LLCs), or C or S corporations. Even if your business is incorporated, most lenders still require a personal guarantee for a commercial vehicle loan for your business.

Dealership Financing

Dealerships and manufacturers do not directly issue loans, but often work with their preferred lenders to offer you financing options. Those loans may not always be the best choice for your company, however.

Lender Preapproval

Before you start shopping, compare lenders and get preapproved for a commercial vehicle loan. This will give you a sense of the loan conditions and interest rates for which you qualify. For a company car or other standard automobile, you can often get better loan conditions from a third-party lender. Dealerships want you to finance through them, so having a preapproval in hand can help you negotiate lower loan rates when you’re ready to buy.

Dealership Financing

For fleet vehicles, specialized equipment or heavy transport vehicles, you may find it’s easier to qualify for a loan if you work with a knowledgeable commercial vehicle dealership. Be sure to do your due diligence to ensure that the dealer is experienced in financing business vehicles. Ask if they have a service shop and if they offer vehicle warranties. Compare preapproval offers with those from the dealership.

SBA Loans

Small businesses – especially startups – often have trouble qualifying for conventional loans. The U.S. Small Business Administration (SBA) has several options to help finance commercial vehicles or equipment. The SBA guarantees loans issued by private lenders, offering reasonable terms and rates.

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How Rates Are Calculated

Interest rates for commercial vehicle loans can be fixed or variable, and are determined by your credit score, vehicle condition, loan amount and loan term.

Credit Score

Lenders evaluate both personal and business credit scores when calculating interest rates. Most commercial vehicle loan borrowers have credit scores in the 700s. If you have bad credit, you will likely pay a higher interest rate and have to personally guarantee the loan.

Vehicle Condition

The vehicle’s miles and overall condition affect the final interest rate. New vehicles have low miles and are in excellent condition, so tend to get better rates. Loans for older vehicles typically carry higher interest rates and require large down payments. Most lenders won’t finance vehicles that are more than 15 years old, or that reach a maximum mileage limit. 

Loan Amount

Most commercial vehicle lenders require a down payment of 10 to 30 percent. While some lenders may offer to finance 100 percent of the costs to prime borrowers, it may not be the best option. Larger loan amounts typically come with higher interest rates and you pay more over the life of the loan. With a larger down payment, you establish equity in the vehicle, and avoid being in a position where you owe more than the vehicle is worth.

Loan Terms

Most commercial vehicle loan terms are no more than 10 years, and frequently much shorter for small automobiles or used vehicles. Longer loan terms often have lower interest rates, but can still end up costing you more over time given the extended monthly payments.

Seasonal and Skip Payments

Some commercial vehicle lenders offer skip payment structures that cater toward specialized seasonal industries, such as agriculture. Skip payments allow borrowers to reduce or miss a loan payment during the slow season and make up the difference by paying larger amounts during busy periods.

Lease Financing and Buyout

Leasing — effectively a long-term rental agreement — is another option to acquire a commercial vehicle. Rather than financing to own the vehicle, leasing finances the vehicle’s use. At the end of the lease term you have the option to return the vehicle, continue leasing or purchase it. Leasing typically doesn’t require a down payment if you have a good credit score.

Commercial vehicle leases can be either an operating lease — where your business does not have any ownership of the vehicle — or capital lease, where your business is a joint title holder. An arrangement particularly popular with fleet vehicle financing is an operating lease with a terminal rental adjustment clause (TRAC) that establishes the purchase price of the vehicle at the beginning of the lease.

Refinance a Commercial Vehicle Loan

If you have an existing commercial vehicle loan with high rates, you may benefit from refinancing — that is, taking out a new loan to replace the existing one — particularly if your business has increased in size and revenue. Compare commercial vehicle refinance lenders to see what rates are available.

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