If your small business needs a commercial vehicle but you are lacking the cash, you can apply for a commercial vehicle loan. Certain businesses need to buy vehicles to complete work-related operations such as transporting employees, completing jobs, and more. Read on to find out everything you need to know about commercial vehicle loans as well as some pros and cons to help you decide if it is the best option for you.
What Is a Commercial Vehicle Loan?
A commercial vehicle loan, also called a business auto loan, is a form of equipment financing that allows you to purchase cars or trucks for your business. The car or truck acts as collateral for the loan itself.
You are required to pay back the commercial vehicle loan in monthly installments of the principal amount plus interest added over the term of the loan. The terms for commercial vehicle loans vary but they are roughly about 5 years.
It is a great choice for businesses who want to keep their vehicle for an extended period of time. If you are not concerned about having the latest vehicle, it is the best option for you. Also, if you intend to drive a lot you will have a lot of mileage so purchasing will be a better choice. If you lease, you end up paying an additional costs per mile that you go over the number of miles that were restricted.
How to Get a Commercial Vehicle Loan
When trying to secure your commercial vehicle loan, being prepared is key. Here is a list of the following documents that lenders will want to see or ask for:
- Business licenses
- Partnership agreements
- Profit-loss statements
- LLC documents
- Tax returns
- Bank statements
- Cash flow statements
- Driver’s license
In addition to the documents above, lenders will also want to review your personal credit and finances. If you have poor credit, you can still get approved, but you will pay higher interest rates and there are penalties if you default on your payments. However, if you repay this loan it can help boost your credit score and history.
Commercial Vehicle Loan Rates and Terms
The amount that you will be able to borrow will depend on your financial situation. The better your credit history is the better your terms and rates will be as this proves that you are financially responsibly which is what lenders seek. If you have poor credit history or score, you will most likely be asked to sign a personal guarantee.
Commercial vehicle loan terms range from 1 to 5 years allowing you to make either weekly or monthly payments. There also might be an application fee or down payment depending on your lender of choice.
Pros and Cons of Commercial Vehicle Loans
Review these pros and cons to have a better sense if this type of financing is right for your business.
- Lengthy repayment terms: lenders give you more time to pay down your debt because the vehicle acts as collateral making it less risky for lends. This also means that it is easier to afford because your monthly payments are less condensed.
- Low interest rates: lenders charge you less interest because they can recoup the value of your debt even if you happen to default on the loan.
- Built-in collateral: the vehicle itself acts a collateral so you do not have to provide additional assets to get a better rate.
- Potentially obsolete vehicles: you might end up with outdated or obsolete vehicles once you are done paying off the loan. If this is a concern for you, you will be better off pursuing equipment leasing instead.
- May be hard to qualify: you must have at least one year in business and solid personal credit to be eligible for a commercial vehicle loan.
Where to Get Commercial Vehicle Loans
If you have decided to move forward with getting a commercial vehicle loan, you need to first find a reputable lender to work with. There are several options to consider.
- SBA Loan 7(a)
- SBA Microloans
- Banks and credit unions
- Alternative lenders
The Bottom Line
There will come a time when a business will need to purchase a commercial vehicle. It is important to fully understand the requirements and interest rates before you apply. You might want to consider an alternative form of financing if you feel like the vehicle will be out of date before your repayment period ends.