Business Auto Loans: How Do They Work?

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Updated on Tuesday, February 26, 2019

Business auto loans
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Many businesses depend on delivery trucks or other commercial vehicles in order to operate. While some businesses lease their vehicles, others decide to buy them in order to build equity and enjoy a tax benefit for depreciation.

Since it’s not always possible for businesses to buy vehicles in cash, many turn to commercial auto loans. Let’s dive deeper into what business auto loans are, when they may be a good option and what it takes to obtain them.

What is a business auto loan?

Business auto loans are designed to help businesses buy the vehicles they need to complete a number of work-related tasks. These tasks may include transporting employees, delivering products to customers and completing jobs.

Banks, credit unions and alternative online lenders offer business auto loans, which are similar to consumer auto loans — however, commercial auto loans may require you to show not only certain personal financial information, but business documentation as well. Businesses can use these loans to purchase new and used vehicles or refinance loans that already exist (though there may be age or mileage limits for used vehicles).

“For most small business owners, a business auto loan will look and feel a lot like a personal auto loan — except that you’re using it as a method to have the business pay for your vehicle and try to run it as a corporate expense,” said Yves-Marc Courtines, principal at Boundless Advice, LLC of Manhattan Beach, Calif.

Should you buy or lease a vehicle for your business?

Some businesses may benefit from buying a vehicle, while others may be better off leasing one. Let’s take a closer look at when buying and leasing are most appropriate.

Buying a vehicle for your business makes sense when: Your business plans to keep the vehicle for a long period of time and rack up a significant amount of mileage. Buying may also make sense if the vehicle can easily be sold or traded in. In addition, it may provide you with tax benefits. Some lenders will even provide financing up to 100% of the cost of the vehicle.

Leasing a vehicle for your business makes sense when: Your business needs to replace or update its vehicles often. Leasing may also be right for you if you don’t have the money for a down payment, as it doesn’t always require one. Keep in mind, however, that leasing comes with mileage limits — so if your vehicles will be used frequently, you may have to pay more for additional miles.

How to get business auto loans

While getting a business auto loan is a bit more time-consuming and involved than getting a consumer auto loan, the process is fairly straightforward. To get a business auto loan, follow these steps:

  • Determine how much money your business has to use for a down payment. In addition, figure out how much you’ll have to spend on the vehicle and the costs associated with buying it.
  • Collect documentation that proves you are the owner of the business. This may include a business license or other documents, depending on your business entity.
  • Gather cash flow statements, tax returns and bank statements that demonstrate the financial health of your business.
  • Shop around and find a few lenders that offer business auto loans.
  • Provide the lenders with proof that you’re a business, including cash flow statements, tax returns, bank statements and your business’ tax identification number. If you’re a sole proprietor, your Social Security Number will work.
  • Wait to receive rates and terms from the lenders you’ve reached out to, so that you can select the most competitive loan for your business.
  • Speak to a certified public accountant, instead of a car salesman, to determine what types of tax benefits your business auto loan may provide.

Understand that often, a lender may assess your personal credit as well as that of your business. This is particularly true if your business is new or has a poor credit score. If this happens, you’ll be responsible for paying off the loan in the event the business fails to do so. Therefore, it’s important to make sure your own credit score and finances are in good shape, as you may be required to undergo a credit check and/or share your personal tax returns.

The bottom line

Many banks and credit unions offer commercial auto loans at reasonable rates and terms. We found APRs as low as 4.2% for as long as 72 months. Keep in mind that lenders may limit the number of loans, therefore limiting the number of vehicles you may be able to buy at once. You can also obtain equipment financing to cover commercial vehicles at online lenders, where APRs may be higher but lending requirements more lenient.

Do not move forward with a business auto loan until you fully understand its interest rate, terms and how it will affect your business financially. By being strategic about the loan you select, you can help your business meet (or even exceed) its goals rather than cause financial problems down the road.