Commercial auto financing, also known as business auto financing, allows you to obtain vehicles for business purposes. You can purchase vehicles if you want to retain ownership after you pay off the business auto loan, or you can do a lease if you want or need to regularly upgrade vehicles. Each has its pros and cons with regard to rates, terms, and qualification requirements. Both buying and leasing, however, allow you to spread the cost of acquiring new vehicles over a period to make it more affordable for your business.
Who Should Consider Commercial Auto Financing
If you need to use your vehicle for business purposes, commercial auto financing can be an ideal fit. While it has many similarities to personal auto financing, you might be able to get better rates and terms with business auto financing. Additionally, business financing may entitle you to certain tax deductions and may be a requirement to protect you from being personally liable for accidents that occur while using the vehicle for business purposes.
Below are some benefits of getting commercial auto financing as opposed to personal auto financing:
- You can limit your personal liability from on-the-job accidents: Commercial auto financing often requires a vehicle to be titled and insured in the business’s name. Doing so can protect your personal assets in the event you are found liable for an accident while using the vehicle.
- You may be able to get more robust insurance coverage: Since business auto financing often requires the vehicle to be titled and insured in the company’s name, you can typically get higher limits for insurance. Commercial auto insurance policies can also offer coverage for a wider range of circumstances more suited to how business vehicles are utilized. Learn more about costs and coverage options in our commercial auto insurance guide.
- You may qualify for tax deductions: Section 179 of the tax code allows business owners to deduct certain costs from taxable income. Since business circumstances can vary greatly, we recommend consulting your accountant or tax professional for details on whether you would be eligible for this tax benefit. You can also learn more about this through our article on the Section 179 deduction.
- You may get approved for more competitive rates and loan terms: Depending on your personal and business qualifications, you might be able to get more competitive terms than you would on a personal auto loan.
Commercial Auto Financing: Buying vs Leasing
With commercial auto financing, you can choose between a purchase or a lease. With a purchase, you’ll be able to keep the vehicle after the loan has been paid off. With a lease, you’ll typically have to return the vehicle once the lease term expires. Each has its benefits and downsides, and the best one will depend on your business goals and circumstances.
Business Auto Financing: Buying
When You Should Get a Business Auto Loan
If you fall into the following scenarios, purchasing a business vehicle could be more well-suited for your needs compared to a lease:
- You expect to use the vehicle for the long term: Purchasing a vehicle means full ownership will transfer to you once you pay off the loan. You’ll have more flexibility in how you use the vehicle compared to a lease, which can be a good option if you believe the vehicle will continue to serve a useful purpose for your company for many years to come.
- The vehicles have a long expected lifespan: While buying a vehicle may carry larger monthly payments compared to a lease, vehicles that have a reputation for being reliable or have low maintenance costs can help keep your business expenses low for the long term.
- You don’t foresee the need to upgrade often: If you don’t see your business evolving to the point where the vehicle will become obsolete, purchasing a vehicle can help you keep long-term costs down.
- You can afford the larger payments of a loan vs a lease: Although you’ll retain ownership of it once paid off, purchasing a vehicle with a loan typically carries higher monthly loan payments.
Pros & Cons of Buying
| PROS | CONS |
|---|---|
| Lower long-term costs as you retain ownership once paid off | Larger monthly payments compared to leasing |
| Easier to get approved for compared to leasing | More expensive path to upgrade vehicles if needed |
| More flexibility in how you use the vehicle | Down payment requirements tend to be higher than leasing |
Business Auto Financing: Leasing
When You Should Get a Business Auto Lease
Business owners who fall into the following circumstances may want to consider leasing a vehicle instead of purchasing it with a loan:
- You plan on upgrading vehicles frequently: With many leases, you’ll have the option to upgrade or exchange your vehicle for a new one at the end of the term. This option is not available if you’re using a loan to purchase a vehicle, making a lease a better option for business owners seeking an easier and more economical upgrade path.
- You only have a short-term need for the vehicle: If you don’t need or want to retain ownership of the vehicle at the end of the term, you can return it at the end of the lease. An added benefit here is that leases typically have lower monthly payments, allowing you to save money if you only have a temporary need for a vehicle.
- You cannot afford the down payment or monthly loan payments of a loan: Leases often have lower down payment requirements as well as smaller monthly payments. This can make it a good alternative if you’re not able to qualify for a loan.
- You won’t be affected by restrictions in the lease terms: Many leases will have restrictions on how you are allowed to use the vehicle. Some examples can include prohibiting modifications from being made to the vehicle and mileage restrictions.
Pros & Cons of Leasing
| PROS | CONS |
|---|---|
| Easier to upgrade or exchange for a new vehicle at the end of the lease term | Can be more difficult to qualify for compared to loans |
| Maintenance may be included free of charge as part of the lease | Lease terms may contain certain restrictions |
| Lower down payment requirements compared to loans | More expensive to lease long-term compared to purchasing |
| Monthly lease payments are often more affordable than loans | |
Business Auto Loan Financing: Rates, Terms & Qualifications
Rates, terms, and qualification requirements will vary depending on the lender you choose, the type of financing you’re seeking, and the strength of your business loan application. However, we’ve listed below typical figures you’re likely to see if you shop rates for commercial auto financing.
Typical Commercial Auto Loan | Typical Commercial Auto Lease | |
|---|---|---|
Origination Fees | 0% to 3% | 0% to 3% |
Estimated Starting Annual Percentage Rate (APR) | 5% to 30% | 4% to 25% |
Loan Amount | Up to $5 million | |
Repayment Term | 2 to 7 years | |
Down Payment Required | 0% to 25% | 0% to 15% |
Minimum Credit Score | 620 | 550 |
Time in Business | 0 to 12 months | 12 to 24 months |
Personal Guarantee | May be required | |
Vehicle Restrictions | Age, mileage, and modification restrictions may apply until the loan is paid off | Age, mileage, and modification restrictions may apply for the length of the lease |
Funding Speed | 1 to 7 days | |
How To Get Commercial Auto Financing
Step 1: Understand the Type of Vehicle You Need
The vehicle you choose will impact subsequent steps of getting financed. This will include the price range, the impact it will have on your business cash flow, and your ability to get approved for a loan. At this stage, it’s important that you also understand why you need a vehicle, whether it will fulfill your business needs, and the impact it will have on your income and expenses. You can also do your due diligence to see if there are other more cost-effective vehicles that can accomplish the same functions.
Step 2: Determine Your Budget and Research Operating Costs
If you’re unable to make timely payments, it will have a negative impact on your business credit and finances. As a result, it’s important that you research and understand all of the costs associated with acquiring a vehicle with commercial auto financing. You should consider vehicle costs such as maintenance, insurance, and fuel. Loan costs should also be considered, such as any origination fees, late fees, or prepayment penalties.
Step 3: Review Your Qualifications
If you understand the strength of your business credit and finances, you can get an idea of what your chances of getting approved will be. Some lenders cater to businesses with excellent qualifications while others allow for more flexibility in exchange for higher rates and fees.
Common qualification requirements include the following:
- Credit score
- Business revenue
- Time in business
- Down payment
- Time with a commercial driver’s license
Step 4: Find a Lender & Apply
Commercial auto financing can be found at different types of lenders including credit unions, banks, online lenders, and business loan brokers. Our guide on how to get semi-truck financing has a section detailing the pros and cons of each of these different types of lenders.
If you’re not sure where to start, you can begin with our list of the best business auto loans. The lenders we selected can offer competitive rates, flexible qualification requirements, and a wide range of loan terms.
Step 5: Review and Accept Loan Terms
If approved for financing, you’ll need to review and accept the final terms. Although uncommon, mistakes do happen and we recommend double-checking the following items before signing:
- Interest rate
- Monthly payments
- Loan or lease term
- Vehicle restrictions, such as mileage
- Loan fees, such as late payment or prepayment penalties
- Options available at the end of the lease, if applicable
Alternatives to Commercial Auto Financing
If you’re unable to get approved with the terms you want for a business auto loan, we recommend heading over to our guide on how to get a small business loan for tips on improving your approval odds. You can also consider the following alternatives:
- Equipment financing: Equipment financing allows you to acquire any business-related equipment, including vehicles. You’ll have the same options for loans and leases, and you can learn more in our guide on equipment financing. For recommendations, check out our picks for the best equipment financing companies.
- Small business line of credit: This is a revolving credit line that allows you to continuously draw funds on an as-needed basis up to your credit limit. Funds can be used for any business purpose without the need to worry about vehicle restrictions. However, repayment terms tend to be limited to three years or less. You can see our choices for the leading small business lines of credit.
- Small Business Administration (SBA) loan: Funds from an SBA loan can be used for nearly any business purpose, depending on the type of SBA loan you get. See our guide on the different types of SBA loans to learn which one might be right for you. SBA loans tend to be more difficult to get and can take between one and three months to get funded. If eligible, however, you can get competitive rates and loan terms. If you’re looking for an SBA lender, check out our top-recommended SBA lenders for small business owners.
Frequently Asked Questions (FAQs)
Commercial auto financing places a larger emphasis on your business qualifications, so the rates and terms you get could be different. Additionally, since commercial financing usually requires you to title a vehicle in the name of your company, it can help protect your personal assets from liability.
With a commercial auto loan, you are purchasing the vehicle and with full ownership rights transferred to you once the loan is paid off. With a lease, you are renting the vehicle and must return it once the lease expires.
Restrictions may apply depending on the lender you choose. Common restrictions include prohibiting certain modifications from being made to the vehicle and limits on how many miles it may be driven before penalties or additional fees are assessed.
Bottom Line
With commercial auto financing, you can acquire a single vehicle or a fleet of vehicles. Depending on your business needs, you can opt for a purchase or lease. While both options allow you to spread the cost over a longer period to make it more affordable for your company, each has its own set of pros and cons that should be carefully considered if you are to choose the one best suited for your business circumstances.
