Updated October 5, 2020
Securing loan financing can mean the difference between launching your new business operations right away or having to wait several months or even years to get things off the ground. A commercial auto loan can be the most direct route to securing vehicles for business use—whether it’s a dump truck for the worksite, a van for your electrical equipment, or a food truck to spread your culinary prowess across the city.
It’s important to understand that even the application process for a commercial auto loan isn’t the same as a regular car loan. There’s a lot more that weighs into the decision from a lender, such as the purpose of the vehicle, whether or not the business truly needs that vehicle, and if the business itself is even secure enough and turning enough of a profit to afford the loan.
Some businesses have the ability to simply purchase their vehicles outright, but smaller businesses or those with tight budgets may choose to finance. If you’re one of those businesses, this is your guide to securing a commercial auto loan.
How Can I Get A Commercial Auto Loan?
First and foremost, you’ll need to take an honest look at your business, its financial status, and whether or not you truly need the vehicle and a loan to buy it. Can you buy it outright? Could you buy a used or older model outright instead of financing a brand new or slightly used vehicle? Remember that vehicles are investments that start losing value as soon as you drive them off the lot, so financing one for your business should be no light decision.
You’ll also want to be sure that your business is in good financial standing (meaning the business’s credit score). If you have collections, defaults, or other lending marks on your business or personal credit report, you could have a tough time securing any kind of funding.
Banks are picky for personal loans and financing, but they’re much pickier when it comes to businesses. There’s a much higher risk involved, and the bank wants to be sure it’s going to both get its principal balance back and turn a profit on the interest rate.
The Steps to A Commercial Loan
Now that we better understand which factors affect securing a commercial auto loan, let’s look at the actual process of obtaining one.
Step 1: Designing A Good Loan Proposal
When you’re asking for financing for any kind of project, you have to understand that you’re a stranger to the financial institution you’re borrowing from. They don’t know anything about you, your business, or your integrity. The only real information they have is what you bring to them and what they can obtain from your credit history. Sometimes, simply having a good credit score just isn’t enough to convince them.
A loan proposal is essentially your sales pitch. You’ll include details about yourself, the business, and why you need the financing. You’ll need to explain what exactly you need (preferably details about the make, model, and type of vehicle you’re looking into).
The bank will also want details about the financial health of the business, so you’ll need to put together some figures regarding your current revenue stream, past revenue stream, and fact-based projections for the future of your business. Be honest with yourself first and take that honesty with you to the bank.
Don’t take a declination as an insult. It’s nothing personal, but if your business isn’t ready to handle such an expense, the bank won’t want to risk it. This is why a good analysis before seeking financing is so vital, so you can be certain you can afford it and that you absolutely need it.
Step 2: Your Credit Score and History
Businesses have their own credit scores that lenders will look at to determine the organization’s creditworthiness. That being said, you can still find commercial auto financing via your personal credit score, but that decision is usually up to you. In some cases, a financial institution will only consider a business credit score or personal credit score, depending on its guidelines on business lending.
Your credit score can have a huge impact on the terms of the loan. A better credit score usually results in better terms, including a lower interest rate. The lower your interest rate is, the less that financing costs you overall. When it comes to your business, keeping the costs down is nothing less than a necessity.
While most banks require a minimum credit score of about 580 to secure financing, you’ll likely be pretty limited as to your options the lower you go on the spectrum. If your credit score isn’t up to par, it might be better to wait and work on improving it before you seek financing. Otherwise, you could end up paying significantly more for financing and have more strict terms on the loan (if you’re approved at all).
Step 3: Consider Your Collateral
Take note of the property, inventory, and other valuable assets that you or your business owns. These items can be given up as collateral. Should you default on your loan, your collateral acts as a guarantee that the bank can recover some or all of that loan. The property, inventory, or other valuables will be seized and sold in order to meet these costs.
If you have anything to provide as collateral, it may make your lenders more willing to work with you, even if you don’t have the best credit score. Be careful what you give up for collateral!
Step 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.
Step 5: Do You Need A Personal Guarantee Form?
Finally, you’ll need to figure out whether you need a personal guarantee form or not. Essentially, this is a guarantee from you to the lender that says you’ll be personally responsible for paying back the loan should the business fail to do so. You’ll need to prove you have money available to offer such a guarantee, of course, and if you can afford to make such a promise, it may be better to simply buy the vehicle outright.
If you’re a newer business or have a lower credit score, the lender will likely require a personal guarantee form, collateral, or both. Be certain that you can adhere to the terms of the loan and that the business can afford to borrow money before you pledge your personal savings to a lender.
Take Business Loans Seriously
Whether you’re financing a vehicle, new physical location, or expansion for your business, it’s important to take borrowing money for your business seriously. The business may be a buffer between the loan and your personal finances, but defaulting on a loan can have serious consequences; especially if you offered up collateral or a personal guarantee form.
Follow the steps accordingly and be sure to take an honest look at your business before you ever consider financing options. Often, buying outright is a better choice for larger businesses, but newer or small businesses depend on such loans to get them through the beginning phases.
We hope this guide has helped you make a more informed decision about securing commercial auto loans in the future!