Disclaimer: Information in the commercial real estate articles is provided for general information only, does not constitute financial advice, and does not necessarily describe Biz2Credit commercial financing products. In fact, information in the commercial real estate articles often covers financial products that Biz2Credit does not currently offer.

A commercial auto loan — also known as a business auto loan — can be the most direct route to owning commercial vehicles. And because the loan is secured by the vehicle itself, you may not have to come up with additional collateral.

However, the application process for commercial auto loans isn’t the same as it is for consumer auto loans. You must prove a business purpose for owning the vehicle. You must also show that you have the finances to repaying the loan.

Sure, some business owners can simply purchase vehicles outright. But smaller businesses or those with tight budgets may choose to finance. Here’s how to proceed:

1. Confirm Your Fit for a Commercial Auto Loan

Take an honest look at your operation, its financial status, and your borrowing purpose. Ask yourself:

• Do you truly need the vehicle to accomplish your business goals?
• Would you be better off leasing a business vehicle?
• Are there alternatives you haven’t yet considered, such as a third-party delivery service?
• Can you buy the vehicle/s outright?
• Could you buy a used or older model outright instead of financing a brand new or slightly used vehicle?

Remember that vehicles start losing value as soon as you drive them off the dealership lot. So, commercial auto financing for your business isn’t always wise.

2. Identify Your Desired Vehicle

It’s smart to take this step early on because many business auto loan lenders restrict borrowing for vehicles of a certain age, mileage, or vehicle type. If you’re seeking a heavy-duty truck, for example, you might need to instead borrow a business equipment loan.

Others lenders may specialize in private party financing (if you’re not buying from a dealer) or fleet financing (perhaps you’re aiming to acquire multiple vehicles).

3. Check Your Credit Score and Report

Your personal and business credit scores and reports can have a huge impact on the terms of a commercial auto loan. A better credit score usually results in more attractive terms, including a discounted interest rate. The lower your rate, the lower your overall cost of repayment.

Review your personal credit scores via your bank or credit card issuer or a third-party service. You can access your consumer credit reports via AnnualCreditReport.com. Also, monitor your business credit via the reporting agencies:

• Dun & Bradstreet
• Equifax
• Experian

Tip: If your credit score isn’t up to par, consider pausing your pursuit of financing to improve your credit. Otherwise, you could end up paying significantly more for financing. You might also have more strict terms on the loan, if you’re approved.

4. Check Lender Requirements

Commercial auto loans are available via banks, credit unions, online lenders, and marketplaces. It’s wise to compare options from multiple types of lenders. Include the financial institutions you already work with, particularly if they offer loyalty rewards.

But before applying, review eligibility criteria that all lenders impose:

• Time in business: Some lenders only work with applicants who have operated for one or two years.
• Industry: You might be left hanging if your business sits within an industry (such as gambling or cannabis) that some lenders won’t touch.
• Minimum personal and business credit scores: Also, ask lenders about what score is necessary to unlock their most competitive interest rates.
• Gross monthly annual revenue or sales: This requirement could get thorny if your business income is seasonal or variable for other reasons.
  
  Bottom line: Be sure that your business is in good financial standing and that you don’t have a bad credit score. If you have collections, defaults, or other bad marks on your business or personal credit report, you could have a tough time securing commercial vehicle financing.

5. Compare Business Auto Loan Lenders

You might prioritize lenders that offer the ability to prequalify. That’s the ability to confirm your eligibility and view your potential rates and repayment terms without a hard credit inquiry or full application.

As part of your research, track each lenders’ characteristics in these key categories:

• Interest rates and APRs: While it’s good to know the rate, make apples-to-apples comparisons by reviewing APRs (ideally on the same day), which account for the rate and annualized fees.
• Fees and discounts: Read the fine print to determine to potential surcharges or savings on each lender’s commercial auto loan product.
• Loan amounts: Assess whether the lender could offer enough funding to cover your set of wheels.
• Repayment terms: Ask about your options for how long you’d have to repay the debt. Then confirm the monthly dues fit within your business’s budget. A free business loan calculator can help break down the total cost of the loan.
• Approval and funding speed: If you’re working on a specific timeline, confirm that the lender can meet it. Online lenders may be faster to act than traditional banks.

6. Prepare Your Loan Application

Your Requested Loan Amount

Unfortunately, it’s not as simple as the vehicle’s sticker price. Don’t forget to account for the vehicle’s secondary but significant costs. These include upfront charges and future maintenance costs, including:

• Tax
• Auto insurance
• Registration
• Repairs
• Fuel
• Routine service
• Driver wages

Financial Documents

Lenders will want to review your company’s books, at least in piecemeal fashion. Proof of your revenue streams is paramount.

Always follow GAAP accounting rules to make this a no-brainer. And if you don’t have a staff accountant, consider consulting one before filing your loan application.

Weigh a Personal Guarantee

You might be asked to provide a personal guarantee if you’re a new business owner with a thin credit file. A personal guarantee is an agreement with the lender that you’ll repay the loan if the business fails. You must prove you have the personal savings available to offer such a guarantee.

Provide a Loan Proposal

It’s effectively your sales pitch, though only brick-and-mortar banks may ask for one. You’ll include additional details about yourself, the business, and why you need the financing.

FAQs about Commercial Auto Loans

Should I get a business auto loan or lease?

A business auto loan might be a better choice if you plan to drive more miles than a lease allows or to customize your vehicle (perhaps for advertising purposes). However, you might prioritize a commercial auto lease if you continually require driving newer models and don’t mind the higher overall cost (including insurance).

What are other ways to borrow for company cars?

If lenders allow it, you might consider paying for a company car via a traditional small business loan or line of credit, even an SBA loan. If your business is a true startup or you plan to use the vehicle for personal use, you could also consider a personal loan or consumer car loan.

What are the benefits of borrowing for commercial auto loan?

Borrowing to pay for your business vehicle means a faster route to ownership without sacrificing your liquidity. You might also enjoy tax benefits and could improve your business’s credit, assuming you make on-time and in-full payments.

What are the negatives of business car loans?

Taking out a commercial auto loan can require strong credit. And if it doesn’t, you could be on the hook for a high interest rate. Other disadvantages of this product include the risk of a personal guarantee. Plus, not all lenders finance all makes and models or report payments to the business credit bureaus.

How does business auto loan repayment work?

Like consumer loans, business auto loans offer upfront funds in exchange for interest and other repayment charges. Your repayment term is the length of time you have to make monthly, installment payments. The unique aspect of commercial auto loans is that your business’s strength determines your eligibility. Plus, the company vehicle must be for official use.

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