How to Get a Commercial Auto Loan
November 20, 2018
November 20, 2018
Updated September 21, 2021
Securing loan financing can mean the difference between launching your new business operations right away or having to wait several months or evenÂ yearsÂ to get things off the ground. AÂ commercial auto loanÂ can be the most directÂ routeÂ to securingÂ commercialÂ vehiclesÂ for business useâ€”whether itâ€™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.
Itâ€™s important to understand that even the application process for aÂ commercial auto loanÂ isnâ€™t the same as a regularÂ vehicleÂ loan. Thereâ€™s a lot more that weighs into the decision from aÂ lender, such as the purpose of theÂ businessÂ vehicle, whether or not the business trulyÂ needsÂ that vehicle, and if the business itself is even secure enough and turning enough of a profit to afford the loan.
SomeÂ business ownersÂ can simply purchase their vehicles outright, but smaller businesses or those with tight budgets may choose to finance. If youâ€™re one of those businesses, this is your guide to securing aÂ commercial auto loan.
First and foremost, youâ€™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 slightlyÂ used vehicle? Remember that vehicles are investments that start losing value as soon as you drive them off theÂ dealershipÂ lot, so financing one for your business should be no light decision.
Youâ€™ll also want to be sure that your business is inÂ good financial standingÂ and that you do not have aÂ badÂ creditÂ score. If you have collections, defaults, or other lending marks on your business orÂ personal creditÂ report, you could have a tough time securing any kind ofÂ commercialÂ vehicleÂ financing.
Banks are picky forÂ personal loansÂ and financing, but theyâ€™reÂ muchÂ pickier when it comes to businesses. Thereâ€™s a much higher risk involved, and the bank wants to be sure itâ€™s going to both get its principal balance back and turn a profit on theÂ interest rate.
Now that we better understand which factors affect securing aÂ commercial auto loan, letâ€™s look at the actual process of obtaining one.
When youâ€™re asking for financing for any kind of project, you have to understand that youâ€™re a stranger to theÂ financial institutionÂ youâ€™reÂ borrowingÂ from. They donâ€™t know anything about you, your business, or your integrity. The only real information they have is what you bring to them in yourÂ loanÂ applicationÂ and what they can obtain from yourÂ credit history. Sometimes, simply having a goodÂ creditÂ scoreÂ just isnâ€™t enough to convince them.
A loan proposal is essentially your sales pitch. Youâ€™ll include details about yourself, the business, and why you need the financing. Youâ€™ll need to explain what exactly yourÂ business needsÂ (preferably details about the make, model, andÂ type of vehicleÂ youâ€™re looking into).
The bank will also want details about the financial health of the business, so youâ€™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.
Donâ€™t take a declination as an insult. Itâ€™s nothing personal, but if your business isnâ€™t ready to handle such an expense, the bank wonâ€™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 absolutelyÂ needÂ it.
Businesses have theirÂ credit scoresÂ thatÂ lendersÂ will look at to determine the organizationâ€™s creditworthiness. That being said, you can still find commercialÂ auto financingÂ via yourÂ personalÂ creditÂ score, but that decision is usually up to you. In some cases, aÂ financial institutionÂ will only consider aÂ businessÂ creditÂ scoreÂ orÂ personalÂ creditÂ score, depending on its guidelines on business lending.
YourÂ credit scoreÂ can have a huge impact on the terms of the loan. A betterÂ credit scoreÂ usually results in better terms, including a lowerÂ interest rate. The lower yourÂ interest rateÂ 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 minimumÂ credit scoreÂ of about 580 to secure financing, youâ€™ll likely be pretty limited as to your options the lower you go on the spectrum. If yourÂ credit scoreÂ isnâ€™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 youâ€™re approved at all).
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 to meet these costs.
If you have anything to provide as collateral, it may make yourÂ lendersÂ more willing to work with you, even if you donâ€™t have the bestÂ credit score. Be careful what you give up for collateral!
Want to learn more about collateral and if it is appropriate for you and your business? Check out this helpful guide from Biz2Credit onÂ Understanding the Risks and Benefits of Business Loan Collateral.
Before giving a loan, banks will most likely want to take a look at your companyâ€™s books. With this in mind, it is important that you keep them organized, straightforward, and easily understandable for readers. Always followÂ GAAPÂ accounting rules to make this a no-brainer. Any confusion on the part of theÂ lenderÂ 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 theyâ€™re ready to be seen.
Finally, youâ€™ll need to figure out whether you need aÂ personal guaranteeÂ form or not. Essentially, this is a guarantee from you to theÂ lenderÂ that says youâ€™ll beÂ personallyÂ responsible for paying back the loan should the business fail to do so. Youâ€™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 youâ€™re a newer business or have a lowerÂ credit score, theÂ lenderÂ will likely require aÂ personal guaranteeÂ 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 aÂ lender.
Whether youâ€™re financing a vehicle, new physical location, or expansion for your business, itâ€™s important to takeÂ borrowingÂ 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 aÂ personal guaranteeÂ form.
Follow the steps accordingly and be sure to take an honest look at your business before you ever considerÂ financing options. Often, buying outright is a better choice for larger businesses, but newer orÂ small businessesÂ depend onÂ loan optionsÂ to get them through the beginning phases.
We hope this guide has helped you make a more informed decision about securingÂ commercial auto loansÂ in the future!