Business Auto Loans: Get Financing for Your Company Vehicle

If you’re a small business owner, there’s a pretty good chance that your company relies on cars or trucks to run its day-to-day operations.

Whether you're a restaurant that does a lot of catering gigs and could use a van, a contractor who needs a pickup truck for site visits, or a delivery service that wants to expand its fleet of vehicles, business auto loans are a way to finance the purchase, lease, or even refinancing of all types of commercial vehicles.

Unlike personal auto loans, which you might use to buy a personal car, this group of financing options is meant exclusively for vehicles used for business purposes (think delivery vans, pickup trucks, fleet vehicles, food trucks, and sales cars). There are usually differences in requirements, loan amounts, payback options, and tax deductions.

You can also get business auto loans through various lending mediums, including banks, credit unions, dealerships, and online lending platforms.

Here's what you should know about these financing options before considering applying for one.

How I Compare Business Auto Loan Options

These are common financing options businesses use to fund vehicle purchases. I've included options that are primary purchase financing, as well as others that are more for supporting or partially funded vehicle purchases.

How the Options Actually Work for Vehicle Purchases

Let's break down the most common types of business auto loans I just went through so you can understand how using them could actually look for your business.

Equipment Financing

Equipment financing is probably the most standard option for buying, leasing, or refinancing a company vehicle. That's because it's specifically for businesses that need to purchase new equipment, which can include everything from machinery to tech and … vehicles! If you need to buy or replace cars or trucks for your business, but can't front the high cost on your own, this loan will help you spread out those payments.

Basically, the lender pays for the car or truck (either directly or by reimbursing you), and then you make monthly payments (plus interest) over a set period, usually somewhere between one and six years.

Key to this funding is that the vehicle serves as collateral, so if you default on payments, it can be taken away. The vehicle-as-collateral part helps to reduce the lender's risk, making this a good option for lower-credit borrowers.

Term Loans

Term loans are provided by lenders as a lump sum and repaid with a set APR over a set period of time. Unlike equipment financing, it can be used for a variety of business expenses, though in this context, it'd be a good way to cover all or almost all of the cost of a new vehicle, if approved.

There are short-term loans, which are paid back in a shorter window (usually anywhere from six to 36 months) and are typically more expensive. There are also long-term loans, which are harder to qualify for but offer better rates, higher loan amounts, and longer terms in general.

SBA Microloans

SBA loans are designed for small businesses and are backed by the Small Business Administration (SBA), a government agency that aims to expand loan access for more small businesses.

SBA Microloans are, as the name suggests, on the small side (up to about $50,000). These are usually geared towards newer businesses, and can be good if you only need to purchase one or two cheaper vehicles.

The SBA guarantees part of the loan, which makes this option one of the best for low interest rates and longer repayment periods. Those benefits also mean they're harder to qualify for. Lenders look for solid financials, credit, and established business history. They're often referred to as the benchmark for affordable business financing, even though they aren't realistic for every borrower.

Commercial Auto Loan

You're probably most familiar with these loans. Commercial auto loans are the business equivalent to a personal car loan, or the financing you can get at a dealership when you don't have cash up front for the entire car. You make fixed monthly payments that include interest over a set term, usually several years, until the loan is paid off.

They're specifically for buying business-use vehicles and can be offered by banks, credit unions, and dealerships. Many businesses can get quite good terms and rates on these, but it all depends on your business's financial history and your personal credit.

Leasing

Similar to the way you might lease a house, you can also lease a car. Basically, instead of taking out a loan to get the truck, you can pay monthly to use it for a set period of time. Then, whenever the lease is up, you give it back (or, if there's the option, buy it).

Like a commercial auto loan, the financing and the vehicle are often handled through a dealership. And sometimes, avoiding traditional lenders means requirements are more flexible.

Leasing can be good if you want to get on the road quickly without a big up-front investment. Monthly payments can be lower than financing, and some leases may include maintenance or service agreements.

That said, there are often restrictions on mileage, usage, or modifications. It can also be more expensive to lease in the long run than to buy through financing.

These next three options are best for supporting or supplementing a vehicle purchase rather than for buying outright/directly.

Business Line of Credit

A business line of credit is similar to a credit card. It allows you to spend up to a certain amount of money on a revolving basis, and you only pay back and accrue interest on what you use in a given period.

It's usually not used to finance the full cost of a truck or car, but it can be good for covering part of the purchase or even the down payment, as well as for things like insurance, maintenance, or registration costs.

They usually have lower interest rates than regular credit cards, and using one can also help build back up your personal credit score if it's low (that is, if the lender reports payment activity to credit bureaus).

This type of funding is flexible but better for smaller expenses than for buying an expensive vehicle. You can use it for related costs, though, like fuel and repairs. The main caveat is that qualifying can be challenging (it's generally one of the harder financing options to obtain), and rates can be high.

Invoice Factoring

Invoice factoring is when a business essentially sells its unpaid invoices to something called a factoring company. The factoring company gives you an up-front payment and takes over the legwork of collecting payments on future invoices in exchange for a cut of them.

It's also usually not used to finance the full cost of a truck or car, but it can help free up cash that's tied up in your unpaid invoices, which can then be used to cover things like a down payment or related ongoing vehicle costs.

This is a great option if you find yourself waiting months for invoices to get paid and have trouble with slow-paying customers. It can help you turn those invoices into immediate cash for things like fuel, vehicle maintenance, and payroll.

Invoice factoring can often be one of the easiest to qualify for because eligibility depends on the strength of your invoices rather than your personal ability to pay a loan back. That said, be mindful that the factoring company's intervention with customers might cause some strain on those relationships.

Merchant Cash Advance

A merchant cash advance (MCA) is a type of financing in which a business receives a lump sum up front in exchange for a portion of its future sales. It's also usually not used to finance the full cost of a truck or car, but it can work well for making a down payment or covering related things like emergency repairs.

After getting the cash advance, you repay a fixed percentage of your daily or weekly revenue (called a holdback) until the agreed repayment total is paid off. That total is determined by factor rates instead of traditional interest rates. For example: An advance amount of $20,000 with a factor rate of 1.3 would equal a total repayment cost of $26,000.

The main caveat is that factor rates make this an expensive option, plus you pay more when sales are high (and less when they're slow). But qualifying is generally easier for those with thin financials or lower credit scores because lenders focus on revenue consistency and sales volume.

The Differences You Should Know Between Business and Personal Auto Loans

If you're considering getting a vehicle loan under your personal name/profile to use for your company rather than financing it as a business vehicle, consider how these factors compare first:

How I'd Use a Business Auto Loan

You can finance many different types of vehicles with business auto loans:

• Delivery vans

• Cargo trucks

• Pickup trucks

• Passenger vehicles for sales teams

• Food trucks

• Trailers

• Specialty vehicles

A lot of people don't realize that business auto loans can also often be used to buy used, not just new, vehicles. Going for used instead of new might even be a smarter option, depending on what your business needs and what you can afford or qualify for.

Beyond simply buying a new vehicle, consider some of the other ways to use the financing options we've discussed:

Fleet expansion and replacement

Down payment

Repairs, fuel, maintenance

Payroll support

Cash flow management

Tax obligations

How To Apply for a Business Auto Loan

If you want to move forward with a business auto loan option, here's what the entire application process looks like, from pre-application to getting your funding.

1. Research lenders: You'll want to spend a good amount of time and energy researching different lenders before applying to any. Try to find the most reputable lender for the particular type of financing you're interested in.

2. Gather documentation: Sometimes, gathering documentation you haven't looked at in a while can take time. So do yourself a favor and get together everything you'll need ahead of applying to make the actual approval process as fast as possible. I'd have handy: an official form of ID, business financials (like cash flow or profit and loss (P\&L) statement), some proof of income (like bank statements or paid invoices), and business licenses or permits.

3. Complete the application: When you're ready, apply for financing. Many alternative lenders offer online applications that take just a few minutes. Clarify's application, for example, takes about two minutes. Once you fill it out, you'll be paired with one of our advisors, who will walk you through options from our network of more than 75 lenders. Sometimes you can even get same-day approval.

4. Loan offer and negotiation: Lenders will review your application. If approved, you may get a loan offer, which is almost always negotiable. You should try not to immediately accept the first quote. Instead, compare options between lenders and use them as negotiation levers.

5. Sign agreement and get funded: Once you've decided on a loan option, you'll sign an agreement accepting the terms and conditions. Then you'll be on your way to getting a vehicle and will start making payments.

What Lenders Look For

Different lending platforms have different requirements. They can vary widely, but these are some of the basics Clarify looks for when evaluating loan candidates. It's a good guide for the general lending landscape, too.

• Credit score. You'll typically need a credit score of at least 550 or higher (other lending platforms may require higher scores). The higher your score, the better terms and rates you'll likely get offered.

• Revenue. Your business should be able to prove that it makes an average of $10,000 per month or more in revenue. The more you bring in, the larger loan you'll likely be able to get.

• Time in business. The longer you've been an established business, the more stable lenders perceive you to be. You should be in operation for a minimum of six months to apply for financing.

• Bank statements. You'll usually need to show the last three to four months of bank statements. This helps lenders see the cash flow of your business and an idea of its financial situation.

What Loan I'd Apply for According to Your Industry

Maybe you're still not sure which option is best for you. Here's what I'd lean toward applying for if I needed a business auto loan, according to the industry.

The Most Common Tradeoffs in Leasing vs. Buying a Business Vehicle

I included leasing as a financing option in our list of funding paths because it's common but distinct from the other options. You might be wondering how to know whether you should just head to a dealership and finance with them, or take on other options with lenders. Here's how you can think it through:

Ways To Use Business Auto Loans to Your Tax Advantage

As I just mentioned, tax deductions are one of the biggest advantages of financing a business vehicle.

Under Section 179 of the US tax code, businesses may be able to deduct the full purchase cost of qualifying business vehicles up to about $2,560,000. The deduction has a phase-out threshold of $4,090,000, but still, that's a lot of savings. Plus, your company might be able to get bonus depreciation, even more write-offs, for the first year you have the vehicle.

Just keep in mind that tax rules change pretty often, so you should talk with a certified tax professional before making any finance decisions based on these things.

FAQs About Business Auto Loans

Here are answers to questions I often get about business auto loans.