What Commercial Auto Financing Is & How To Get It
This article is part of a larger series on Business Financing.
Small businesses looking to purchase or lease vehicles, fleets of vehicles, or even certain equipment can use commercial auto financing to obtain these assets. Both traditional and online lenders offer financing options with various terms, funding amounts, and required qualifications. By using business auto financing, companies can manage cash flow by spreading out the cost of large asset purchases over a period of time.
If you’re looking for a commercial auto loan, National Funding is an excellent choice. It offers loans to businesses that have at least six months in operation and $150,000 in annual revenue. National Funding can lend up to $500,000 for up to five years. Check out National Funding’s website for more information or to apply for financing.
Who Commercial Auto Financing Is Right For
Commercial auto financing is useful to businesses for many reasons. It allows a company to purchase or lease vehicles for employee use, transport customers, transport goods, and keep personal and business vehicles separate.
While commercial auto financing is similar to personal auto financing, there are three important differences:
- The vehicle is for business purposes: Unlike personal vehicle financing, lenders may ask for a business plan or company financial statements if the vehicle is to be used for business purposes.
- The vehicle can be titled in the business’s name: This allows the business owner’s credit and assets to be protected if the business cannot repay the debt. However, many lenders will still require a personal guarantee for the loan or lease, making the owner still financially liable for the business debt.
- Some tax deductions are available: Ownership and operation costs can be deducted from business taxes, as well as depreciation. Section 179 of the tax code allows for the business to take the entire deduction at once. Consult your tax professional for more information.
General Terms for Commercial Auto Loans
Numerous lenders, both traditional and online, offer commercial auto loans with various rates, fees, terms, and requirements. The table below includes some general requirements to expect when you start shopping for a lender.
As low as 2.49%
Varies per lender—some have none
Prepayment Penalty/Termination Fee
Varies per lender—some have none
Varies per lender
Generally up to $250,000—some as high as $5 million
Generally up to 60 months—some as high as 84 months
Vehicle titled in the business’s name
24 hours to one week
Vehicle Age Limit
Some have no limit—others have a maximum age limit
Some have no limit—others have a maximum mileage limit
Qualified Vehicle Sellers
Generally, dealer and private party allowed with a free-and-clear title
As low as 550—usually above 625
Varies—some have none
Time in Business
Some accept startups—some require being in business for six months or longer
How To Get a Commercial Auto Loan
1. Determine Your Budget
There are a few different factors to consider when determining your budget. First, you need to figure out what monthly payment your business can afford in relation to your monthly revenue. Additionally, you should budget for recurring expenses, including fuel, maintenance, and storage fees for heavy-duty vehicles.
You also need to consider how much more revenue the vehicles will generate as part of the budget calculation. For example, a trucking company can generate more revenue with the purchase of additional trucks. All of these factors will determine what you can afford to purchase.
2. Choose a Vehicle and Lender
Once you have a budget in mind, start looking for vehicles and shopping for lenders. Our buyer’s guide will give you a list of the best commercial auto loan providers. While you begin the process of choosing a vehicle and a lender, it’s also a good time to review your business credit to get an idea of your chances of being approved.
3. Gather Documents
Each lender will require different documents during the loan application process. Here’s a list of some of the documents that your lender may require:
- Tax returns (business and personal)
- Business financial statement (profit-loss)
- Business incorporation agreement
- Federal tax ID number
- Bank statements (business and personal)
- Business plan
- Additional cash flow statements
4. Apply for Financing
Once you have determined your budget, chosen a vehicle, selected a lender, and gathered your documents, it’s time to apply for financing. Most online applications can be completed in minutes, with approval in less than 24 hours.
5. Accept the Loan Terms & Sign for the Vehicle
Once the lender has approved you, review the terms and conditions of the loan carefully before signing. Pay close attention to the interest rate, repayment terms, and any restrictions the lender places on your vehicle selection. Some lenders will limit how old a vehicle you can choose and how many miles that vehicle can have. If the terms and conditions are agreeable, sign the loan paperwork and complete the vehicle’s financing.
Buying vs Leasing
Sometimes buying vehicles or equipment outright might not be in the best interest of your business. Depending on whether you intend to keep the vehicle or equipment long-term, an equipment lease might be the more affordable option.
|No annual mileage limits||May require a down payment|
|Vehicle ownership transfers at end of loan without balloon payment||Longer repayment terms and higher payments|
|Usually no prepayment penalty||More depreciation with longer terms—makes trade-in value less|
With a commercial auto loan, the business has the right to put as many miles on the vehicle as it wants. Once the loan is paid off, the business owns the vehicle and can transfer it to a new owner or keep it. Also, there are usually no prepayment penalties associated with commercial auto loans.
On the negative side, the lender may require a down payment. The repayment terms will likely be longer with higher payments than leasing. Because the terms are longer, the vehicle will not retain as much value at the end of a loan, making it less valuable to trade in or sell.
|Lower payments and shorter terms||Can come with annual mileage limits|
|Easier and cheaper to upgrade at the end of the loan with a walk-away option||Ownership doesn’t automatically transfer with all leases|
|May not require a down payment (but may require a security deposit or first month’s payment)||Large balloon payment at the end of some leases can be challenging if business cannot walk away|
Whether you use automobile or equipment leasing, the advantages include lower payments and shorter terms. In addition, leases with a walk-away option can save your business money by allowing you to walk away from a sizable balloon payment. The lease may not require a down payment either, although you may be required to pay a security deposit or the first month’s payment.
On the negative side, annual mileage limits might require businesses to pay extra for additional miles. In addition, the ownership doesn’t transfer to the business owner automatically at the end of all leases. If a business doesn’t have a lease that includes a walk-away option, the business could face a large balloon payment.
Commercial Auto Financing vs Equipment Loans
When financing commercial trucks, many lenders will require you to take out an equipment loan or lease instead of commercial auto financing. You can check out our guides on equipment loans and equipment leases for more information.
If you are ready to move forward with an equipment loan, South End Capital offers loans of up to $5 million for up to 60 months with no minimum time-in-business requirement.
Commercial auto financing allows a business to purchase or lease vehicles, fleets of vehicles, or even certain types of equipment. As a result, companies can spread out the cost of large asset acquisitions over a long time.
Businesses can purchase vehicles and equipment or lease them. Leasing vehicles and equipment can provide additional benefits to both short-term and long-term cash flow. Businesses should consider all factors involved with commercial auto financing before choosing a lender or a leasing company.