Business auto loans: What they are & how to get one

If you can’t pay cash for your company car, it’s worth exploring business auto loans. These loans and the application process share many similarities with personal auto loans. As with standard auto loans, your vehicle secures the loan — the lender can repossess it if you fail to make loan payments.

Lenders will want reassurance that you’re using the vehicle for business purposes, but the upside is you could qualify for a few tax breaks. Here’s what to know about business auto loans, how to get one and if you should consider alternative funding sources.

What is a business auto loan?

A business auto loan is a secured loan. It can finance purchasing a new or used vehicle for business purposes. Banks, credit unions and online lenders offer these loans. The cost of borrowing varies by lender and your financial profile.

Lenders set their approval guidelines for these loans. They may require your business credit score, personal credit score or both to meet certain thresholds. They may also set a minimum time in business and annual revenue.

Some will allow you to take out the loan in your company’s name, but you may need to provide a personal guarantee, which means your assets could be at risk if you default on the payments. Depending on the lender, you may be required to use the vehicle solely for your business.

This restriction has an upside. You can deduct more of your interest on a vehicle you use only for a business than one used partially for personal needs. Plus, you may be eligible for the standard mileage deduction to get a break at tax time. Consult with a reputable tax professional to learn more and determine your eligibility.

Should I lease or buy a business vehicle?

Instead of buying, you can also lease a vehicle for your business. Leasing a vehicle could be better if you don’t plan to keep the vehicle long-term and qualify for a lower monthly payment. Leasing still allows you to access certain tax benefits.

But if you know you’ll need to make significant alterations to the vehicle or plan to drive it a ton, a lease likely isn’t a good fit. This is also the case if you prefer to own the vehicle for an extended period and may want to explore the possibility of an extended loan term to make the monthly auto loan payments more affordable. Consider if the mileage and usage restrictions work for your situation.

How to get a business auto loan

1. Set a budget: Whether you’re buying a new or used vehicle, calculate how large of a monthly payment your company can afford. It’s equally important to factor in the overall cost of the vehicle so you’ll know what to expect. Use the business loan and interest rate calculator to simplify the process.
2. Review your credit: Check your personal and business credit scores and reports to identify errors. File disputes with the respective credit reporting agencies to ensure your score accurately reflects your credit history when you apply for financing. It can take up to 30 days for a creditor to respond, so review your credit well before you want to buy. Higher scores and a clean credit history can help you qualify for a lower interest rate.
3. Choose a vehicle: Come armed with a new car checklist. Look at available options and decide on the type of company vehicle that best suits your needs. Remember that some lenders may only finance new vehicles, while others may have tight restrictions on the used vehicles they finance. It’s best to know exactly what you’re looking for before exploring lenders.
4. Get preapproved: Shop around with at least three different lenders. If the lenders offer preapproval, apply to view potential loan offers. Doing so helps you compare offers to find the best deal on commercial vehicle financing. Some lenders may require that you provide documentation proving you own the company before issuing loan preapproval.
5. Provide documentation: You may need to provide your employer identification number, Social Security number, business license and financial information. The lender will also likely request personal documents proving your personal income and creditworthiness.

Where to get a business auto loan

If you’re ready to research business lenders, you have two primary options: brick-and-mortar lenders and online lenders.

Brick-and-mortar lenders

Traditional banks, like Bank of America, offer loans with competitive rates and amounts starting at $10,000. These loans typically have mileage and vehicle age restrictions.

Credit unions also feature commercial vehicle loans, and their business auto loan rates are often more competitive than those of a traditional bank. The process can be lengthy with either option, and you’ll typically need to provide a lot of paperwork.

Online lenders

While not as strict as bank lenders, online lenders generally still require that you have a reasonable credit score and meet the minimum time in business guidelines. Some also impose restrictions on vehicles that can be financed. Still, you may find it easier to qualify, and the interest rate ranges are often comparable to a bank or credit union.

One such lender is National Funding — it offers loans for commercial vehicle purchases and leases to business owners with a credit score over 660 who’ve been in business for at least six months.

Alternatives to business auto loans

Going with a business auto loan isn’t your only option, though. Here are three alternatives that could help you secure the car your business needs.

• Small business loan: You can finance a vehicle with a small business loan or business line of credit.
• Consumer auto loan: A consumer auto loan could be better if you use the vehicle for personal and business purposes. These can be easier to secure, but you put your personal credit on the line rather than your company’s.
• Leasing: The car won’t be an asset your business can claim, but there are ways to incorporate the cost into your taxes to save money when you file. Leasing a car may also be less expensive on a month-to-month basis, depending on the financing terms you qualify for.

Bottom line

When you’re ready to finance a vehicle for your business, take time to compare your options and get rate quotes from at least three lenders. Interest rates have significantly increased in the past years, but by doing your homework, you give yourself the best chance at finding a business auto loan with terms that work for your company’s financial situation.