How to Get a Small Business Auto Loan

For medium-sized and small business owners seeking to expand their operations, a business auto loan offers a valuable solution for acquiring company vehicles without depleting crucial cash flow.¹ These loans enable businesses to meet customer needs, facilitate daily operations, and potentially benefit from significant tax advantages.²

 

 

What Is a Business Auto Loan?

 

A business auto loan, also known as a commercial auto loan, is a financing product specifically designed for the purchase of a vehicle for business use.³ Similar to a consumer auto loan, it is typically an installment loan where the vehicle itself serves as collateral.⁴ This means that while a personal guarantee might not always be required, the lender can repossess the vehicle if the borrower defaults on the loan. Repayment occurs through regular monthly installments, with loan terms and interest rates varying based on the lender and the borrower’s creditworthiness.⁵

 

 

Tax Benefits of a Business Auto Loan

 

One of the most attractive aspects of a business auto loan is the potential for tax deductions.⁶ If the vehicle is used exclusively for business, its entire cost may be deductible from your business income.⁷ For vehicles used for both business and personal purposes, only the business-use portion can be deducted. You can calculate this deduction using one of two methods:

 

• Standard Mileage Rate Method: As of January 1, 2023, the business standard mileage rate was 65.5 cents per mile.⁸ You calculate your deduction by multiplying the total business miles driven during the year by this rate.

   

• Actual Expense Method: This method involves multiplying the overall operating costs of the vehicle by its business use percentage.⁹ Operating costs can include “gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments) attributable to the portion of the total miles driven that are business miles.”¹⁰

   

For the most specific and up-to-date requirements for either method, it is essential to consult the IRS.

 

Where to Find a Business Auto Loan

 

Business auto loans are not as prevalent as standard consumer auto loans, primarily because commercial vehicles often depreciate faster. According to an analysis from Finder, commercial vehicles can lose 30% of their value in the first 12 months and an additional 20% each year thereafter, compared to personal vehicles which lose 20% in the first year and 10% annually thereafter. Despite this, several types of lenders offer commercial vehicle financing:

• Banks and Credit Unions: These traditional financial institutions typically lend to businesses with a proven track record of profitability and at least two to three years of operation.¹¹ Loan amounts usually range from $10,000 to $250,000, with terms up to six years, and vehicles often must be used exclusively for company purposes.

   

• Alternative Lenders: This category includes private financing companies, dealerships, equipment financing companies, and government sources.
  • Equipment Financing: Many alternative lenders offer equipment financing, which is a type of loan that can be used for tangible assets like vehicles, machinery, and other tools.¹² These loans often cover 80% to 100% of equipment costs, with interest rates ranging from 2% to 20%.

     

  • SBA Loans: The Small Business Administration (SBA) offers programs like the SBA 7(a) loan, which can be utilized by small businesses for various purposes, including working capital, equipment, and vehicles.¹³

     

 

5 Steps to Get a Business Auto Loan

 

Once you’ve decided on a lender, the process of securing a business auto loan generally involves these steps:

1. Determine Your Needs and Establish a Budget:
   • Assess the specific vehicle requirements of your company, considering factors like the type of service, business scale, and revenue.
   • Calculate an affordable monthly payment by incorporating all expenses, including loan payments, maintenance, fuel, insurance, and various fees. A loan calculator can be helpful here.
   • Avoid over-borrowing to ensure the loan remains manageable for your business.
2. Review Your Credit:
   • Lenders will evaluate both your business and personal credit scores. Your credit profile heavily influences loan approval, interest rates, and loan terms.¹⁴

      

   • Before applying, check your credit reports for any errors and dispute them promptly.
   • Generally, a FICO score of at least 600 is required to qualify for most business auto loans.
   • If your credit history is insufficient, consider applying with a co-signer (an additional person responsible for repayment) or offering a personal guarantee (your personal promise to repay the loan if the business defaults).
3. Choose a Vehicle:
   • Select a vehicle that precisely fits your business needs. Your choice can influence the type of loan you seek:
     • Business car loans are typically for vehicles weighing under 5,000 pounds.
     • Equipment loans are generally for vehicles weighing at least 5,000 pounds.
   • Be aware of lender restrictions; many may decline to finance vehicles over five years old or with more than 75,000 miles.¹⁵

      

4. Submit Your Application:
   • Complete the loan application with your chosen lender. Application requirements vary, but common documentation includes:
     • Business Information: Business name, address, organizational type (e.g., LLC, Corporation), valid tax identification (EIN), annual revenue, and employee headcount.¹⁶

        

     • Personal Information: For the business owner or a significant stakeholder, this may include name, address, Social Security number, proof of ownership, and personal financial information.¹⁷

        

5. Sign the Loan Documents:
   • Upon approval, meticulously review the loan documents to ensure you fully understand all terms and conditions.
   • Ask the lender to clarify any concerns before signing. Repayments will commence shortly after the loan funds are disbursed.