How To Get A Business Auto Loan

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Vehicles for business use can be a valuable asset for small businesses, but building a fleet can be costly. For companies that need vehicles to do business, business auto loans can make acquiring new or used vehicles feasible. The perks of such a loan can include tax benefits, competitive interest rates and fast approval times.

What Is a Business Auto Loan?

A business auto loan, also known as a commercial auto loan, is used to purchase a vehicle for your business. As with most vehicle loans, a business car loan is often secured with the vehicle serving as collateral for the loan. While this typically eliminates the need of a personal guarantee, your lender can repossess your car if you default.

Business car loans are installment loans, requiring you to repay the loan in monthly installments. Loan terms vary depending on the lender and your credit score, similar to standard auto loans.

Tax Benefits

If you use your car only for business use, you may deduct its entire cost from your business income. However, if you use the car for both business and personal use, you may deduct only the cost of its business use. To calculate your deduction, use either the:

  • Standard mileage rate method. Calculate the fixed and operating costs of the vehicle by multiplying the number of business miles traveled during the year by the business standard mileage rate, which is 65.5 cents as of January 1, 2023.
  • Actual expense method. Multiply the overall costs of operating the vehicle by the vehicle’s use percentage in the company. The IRS outlines the operating costs as “gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments) attributable to the portion of the total miles driven that are business miles.
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To obtain the specific requirements for either method, consult the IRS.

Where To Find a Business Auto Loan

Business auto loans aren’t as common as standard auto loans. Vehicle depreciation deters some lenders from offering commercial auto loans. Company vehicles can depreciate faster than personal vehicles, with commercial vehicles losing 30% of their value in the first 12 months and 20% each year after, according to an analysis from Finder, a personal finance site. By comparison, personal vehicles lose 20% of their value in the first year and 10% every following year.

Nonetheless, as you look for a business auto loan, there are various lenders you can choose from.

Banks and Credit Unions

Banks and credit unions typically offer business auto loans to companies with a track record of profitability. Businesses also must have been in operation for at least two to three years.

Business auto loans from banks and credit unions range from $10,000 up to $250,000 with terms up to six years. These loans can be used for cars, vans or trucks, and banks often require the vehicles only be used for company purposes.

Alternative Lenders

There are also alternative options for businesses looking to finance one or more vehicles. Alternative lenders include private financing companies, dealerships, equipment financing companies and government sources.

Some alternative lenders offer equipment financing, which allows you to finance tangible assets such as vehicles, machinery, computers and other tools needed to do business. Equipment loan interest rates can range from 2% to 20% and cover 80% to 100% of the equipment costs.

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The SBA offers SBA 7(a) loans, which small businesses can use to cover the cost of working capital, equipment and vehicles.

5 Steps To Get a Business Auto Loan

Once you decide on a lender for your business auto loan, there are several steps you’ll likely take to acquire the loan.

1. Determine Your Needs and Establish a Budget

Before you apply for a business auto loan, determine your company’s vehicle needs and the loan payments that you can afford to repay. For many loans, a loan calculator can help you calculate what payments could look like.

The number of vehicles you need to finance depends on several factors such as the type of service your company offers, the scale of your business and its revenue. It’s important to not over-borrow and to take on a loan you can afford to repay.

Make sure to incorporate expenses such as monthly payments, maintenance, fuel, insurance and fees. Your budget should include all one-time and recurring expenses.

2. Review Your Credit

Business lenders may review both your business and personal credit score. As with any loan, your credit score will help determine loan approval, interest rates and the length of your loan’s term.

Before applying, check your credit score. If you notice any mistakes, contact the credit bureau to resolve any errors. Lenders typically require a FICO score of at least 600 to qualify for most business auto loans.

If your credit score or history falls short, consider applying with a co-signer or a personal guarantee. A co-signer is an additional person who’s responsible for repaying the loan if you default, while a personal guarantee is a promise that you’ll personally repay the loan if your business can’t.

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3. Choose a Vehicle

Certain vehicles, such as trucks or specialty vehicles, are built as fleet vehicles and can be cheaper than standard vehicles. Before you continue, decide which vehicle fits your business needs. Typically, the vehicle you choose can also determine the type of commercial vehicle loan you’ll need:

  • Business car loans are best for vehicles that weigh under 5,000 pounds.
  • Equipment loans are best for vehicles that weigh at least 5,000 pounds.

Lenders may decline to finance some vehicles, such as vehicles that are over five years old or one with more than 75,000 miles.

4. Submit Your Application

Once you determine your vehicle and financing needs, submit an application with your preferred lender. While applications can vary by lender, most lenders require documentation to verify your business’s ability to repay the loan. Some common requirements include:

  • Business information. You’ll likely need to provide information about your business, including its name and address, the type of organization, a valid tax identification, annual revenue information and an employee headcount.
  • Personal information. The owner of the business, or someone who holds a significant stake in the company, may need to provide personal information that can include your name, address, Social Security number, proof of ownership and personal financial information.

5. Sign the Loan Documents

After approval, review the loan documents to make sure you understand the loan terms. If you have any questions regarding the loan documents, ask the lender to clarify your concerns before signing. Shortly after the loan is dispersed, you’ll begin repayment.