Loans are a vital financial resource for any small business. Today, there are many different types of commercial loans available, including commercial real estate loans, commercial term loans, commercial auto loans, and more. These loans can be a lifesaver in a pinch (some span between just one or two years) or can be used to finance the future of the business. However, despite how beneficial they can be, many businesses struggle when it comes to securing a loan on account of a lack of understanding of the steps and qualifications necessary to obtain one. In this article, we’ll focus in on one of the more common types of commercial loans that a business can get: the commercial auto loan.
What is a Commercial Auto Loan?
A commercial auto loan is a loan given to a business to cover the purchase of vehicle used for business purposes only. For instance, if you run a plumbing business and you need a van to travel from client to client and carry your supplies, you can take out a commercial auto loan to cover the cost of buying the van.
The same applies to all sorts of businesses that rely on transportation for their work. Trucking companies, electricians, food truck owners, taxi or ridesharing drivers all need top-notch vehicles. For mobile businesses like these, having vehicle financing is an absolute necessity to allow them to expand.
Applying for a commercial auto loan isn’t as simple as you’d think. Banks, credit unions, and lenders of all sorts won’t give just anyone a loan and it’s important that you look at it from that standpoint. You have to convince them that not only do you need the vehicle, but also that your business is secure enough that by loaning you money, they will not be taking on too much risk. Some industries in particular suffer from this risk question – and traditional lenders will often be unwilling to work with them.
Before applying for a commercial auto loan, consider whether or not your business should buy a vehicle outright. As you own a vehicle it depreciates in value, and fast too, so it may make more sense for your business to lease instead of buy. Deciding if a purchase is the right call is only the first step – next you’ll have to prepare to apply for funding.
How to Get a Commercial Auto Loan
Once you decide that buying a vehicle makes sense for your business, there are several key steps to consider. For example, it is important that both your personal documents as well as your business documents are up to date and show your company’s creditworthiness. Poor credit ratings and qualifications will make it much harder to get a loan and even if a financial group gives you a loan despite a bad credit history the terms will undoubtedly be more stringent than they would be otherwise.
Here are the steps you should take to get your commercial auto loan as quickly and painlessly as possible.
1. Design a Good Loan Proposal
Remember that, except in rare occasions, the bank does not know you as an individual or know much about your business. So your loan proposal is a quick and important way of selling yourself and your business to the bank. Your loan proposal should contain certain important information, including what the loan is for, how much money you are looking to receive, what collateral you are willing to use, data-based forecasts of future revenues, and the payment timeline you know you can meet. This will give the bank a good overview of your standing along with the risk you pose. Selling one’s self to banks is in many ways an art. By showing facts and figures that reflect a strong business with a good foundation, you can place yourself as low as possible on the risk meter. First impressions are key, and this is your version of a first impression, so make it good.
2. Look At Your Credit Score
You hear a lot about them. In business, credit scores are still a huge aspect of being able to run a successful business on account of the weight they have in the loan application process. A person’s credit score provides banks with a judgement of the individual’s ability to pay back their debts. It’s important to the bank that your credit history is strong and reflects someone who is financially responsible, otherwise they will feel less inclined to give you a loan based on the risk. Very often, a personal credit score can change the terms of the loan you receive, even if your other business attributes are on point. As a result, before meeting anyone about a loan, it’s important you know exactly what your credit score is and understand what the typical minimum credit score is to receive a loan from the bank you are considering. As reference, most banks require a minimum credit score of 580. Though there are ways to get a loan with bad credit, it is a much harder process and the terms are not nearly as favorable.
3. Consider What You Can Offer Up As Collateral
Collateral is a piece of property, inventory, accounts receivable, or some other asset that can be taken from a business in the even that they fail to repay the loans. It’s important that you consider carefully what it is you might want to offer up as collateral and have an idea of a few different assets you can offer before pursuing a loan. When you’re getting a commercial auto loan, typically the vehicle you purchase will be used as collateral by default. However, if you’re just starting out, or want to change the structure of the loan, you can offer alternatives to the lender.
4. Make Sure Your Financial Documents are Up to Date
Before giving a loan, banks will most likely want to take a look at your company’s books. With this in mind, it is important that you keep them organized, straightforward, and easily understandable for readers. Always follow GAAP accounting rules to make this a no-brainer. Any confusion on the part of the lender may cause them to deny your application. Consider seeking the advice of a trusted accountant, as they can help you straighten everything out and make sure they’re ready to be seen.
5. Find Out If You Need to Sign a Personal Guarantee Form
A personal guarantee form is simply a promise from you to the lender that should your business fail to pay back the loan, you are responsible for repaying it from your personal savings. Personal guarantees are usually required when you have a poor credit score or a relatively new business. As always, it is important that you seek legal advice from a qualified lawyer before signing any binding contracts. Often, if the collateral is in good standing, you may be able to secure the loan without requiring this extra step.
The Big Picture
For small businesses, loans are an extremely important resource, and of the many different small business loans available, commercial auto loans are one of the most common. Through the above steps, you can make sure that you head into the process prepared and informed. That said, it is important to remember that owning a vehicle does not make sense for all businesses, so depending on the operation you are running, it is important weigh the aspect of buying versus leasing.