The rules of commercial vehicle financing

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Ask a Lender
April 11, 2017 | Updated September 27, 2017


Key Points

Obtaining a commercial vehicle loan

  • Research the loan process before you visit a lender.
  • Be wary of loans that require a personal guarantee.
  • Purchase and lease agreements are available for a wide range of needs.
  • Small Business Administration (SBA) loans help those who don’t qualify for traditional financing.

Financing a vehicle for your business is a bit different than doing it for personal use, but many lenders have commercial loan products for that purpose.

There are a few ways to obtain an auto loan for your business. Doing your homework is the first and most crucial step in securing a lender’s help. The list of questions you’ll need to answer is lengthy and includes:

  • Why do I need a loan, how much will I need and how will I repay it?
  • Do I have collateral to secure a loan, and should I use the business itself as collateral?
  • Should I sign a personal guarantee if the business is new, with no credit or collateral?
  • What kind of loan should I obtain that best fits my business’s financial structure?

The first steps

Lenders large and small offer commercial vehicle loans. But if you’re a sole proprietor who has yet to incorporate — about 70 percent of businesses are, the U.S. Small Business Administration (SBA) says — you may find rough sledding when it comes to getting any type of loan.

Consider becoming a C or S corporation, or a limited liability corporation (LLC). Doing so may not only make you more attractive to prospective lenders, it will also keep you from putting personal assets at risk.

If you already have a trusted banking adviser, that individual should be the starting point for loan inquiries and deeper research. Before seeing your adviser, seek out some basic information. Get a combined credit report (from credit agencies Experian, Equifax and TransUnion, with your personal FICO scores) as well as a credit report for your business to identify any potential red flags. Set a budget that includes a down payment and repayment plan. Ask other business owners for loan advice. Construction companies are particularly useful because they regularly purchase new or replacement vehicles.

Business owners without much credit will still need a financial portfolio that details their revenue and expenses, how they plan to grow in the near future, how many employees they have and their company’s mission. Lenders may require a personal guarantee if your credit history is minimal or your scores are poor. In such a case, if the business defaults on the loan, you’ll be liable for repayment.

Buy or lease

Commercial vehicles can be purchased or leased in a variety of ways. For example, a lender might offer fixed-rate, small-business auto loans for cars, vans and light trucks with a minimum loan of $10,000 and terms from four to six years. They might also offer commercial vehicle loans for specialty vehicles over 2 ½ tons, with a minimum loan of $25,000 and terms ranging up to seven years.

Some lenders will offer specialty vehicle financing — for example, purchase and lease products for outfitting a vehicle with a crane, mechanized lift, towing equipment or right-side driving capability.

Manufacturers typically offer their own commercial financing and lines of credit. A line of credit works more like a credit card, so the business owner has more flexibility for purchasing vehicles. A typical credit line might start at $250,000. Manufacturers also may offer Guaranteed Asset Protection (GAP) insurance, which covers the difference between the remaining loan balance and the vehicle’s market value, given there is a steep depreciation curve once a vehicle leaves a dealer’s lot.

If you drive roughly 10,000 miles a year, are looking to replace your vehicle about every three years, or want lower monthly payments than a purchase offers, consider a lease. There are additional financial benefits to a lease. You can deduct the monthly payments, up to a certain limit, from your business expenses and there are no taxable gains or losses when you return the vehicle to the dealership.

SBA loans

SBA loans are an option for those who are struggling to qualify for a traditional bank loan. The SBA’s basic loan program aimed at for-profit business requires, among other items, a personal background and financial statement, a profit and loss statement, a projected financial statement, tax returns and previous loan applications.

The SBA doesn’t lend directly but offers guarantees to established lenders, giving them recourse in case of default. The SBA’s Express program guarantees loans up to $25,000 without requiring collateral. The SBA also offers microloans for up to $50,000 and terms as long as six years. SBA loans typically come with stringent requirements. They aren’t available to nonprofits and a wide array of prohibited-category businesses. They work best for businesses with good credit and cash flow.

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