How To Get a Small Business Auto Loan

A small business auto loan is a type of loan product that can help you finance the purchase of a new car, truck or other vehicle for use in your business. If you regularly use a vehicle for your work — other than to commute — then a small business auto loan can help you.

Read on to learn more about small business auto loans and how you can get a loan to finance your new business vehicle.

What is a small business auto loan?

A small business auto loan is a loan intended to finance the purchase of a vehicle used for business purposes. For example, if you own a flower shop, you could use a small business auto loan to purchase a van for flower deliveries. You can use a small business auto loan to purchase any vehicle under 2.5 tons. If you need to purchase something larger, such as a concrete mixer for your construction business, you’ll need to apply for an equipment or commercial truck loan.

Unlike some other business loans, a small business auto loan is secured debt, meaning the car is the collateral for the loan. The bank will repossess the vehicle if your business defaults on the loan. In most cases, the vehicle will be in the business’s name, not yours, because it’s business property.

How to get a business auto loan for your small business

Getting an auto loan for a small business is much the same as getting any other type of business loan. Follow these steps to get a business auto loan:

1. Determine how many business vehicles you need and how much of a loan you can afford

First, carefully consider what you need and how much you can afford to make in monthly payments. If you’re just starting your business, you may only need one vehicle, but if you have an established business with a fleet, you may need to purchase multiple cars at once. When figuring out how much you can afford to spend on your new vehicle, consider all the associated costs, not just the monthly payment amount.

Also examine how much you can afford, including these common expenses:

• Down payment
• Fees
• Taxes
• Insurance premiums
• Registration costs
• Maintenance
• Fuel

2. Check your credit report

When you decide you need a new business vehicle, check your business and personal credit reports for mistakes. A business credit report helps banks and other lending agencies assess your small business’s creditworthiness. Just like a personal credit score, your business credit report will include a credit score for your business. The higher the score, the more reliable your organization appears to lending agencies. A business credit report includes data such as:

• Company information
• Business registration
• Operational details
• Public filings against the business
• Payment history
• Number of accounts

You’ll also need to pull a personal credit report. Adding your personal credit to the application can help you get a lower interest rate if your business’s credit score is low or if the business lacks sufficient credit history, as in the case of a newer company. Once you have both reports, identify any discrepancies and seek to resolve them. This process generally takes 30 days, and you should have errors removed before applying for loans.

3. Choose your desired business vehicle

Just like you would for your own car, determine the exact make and model that suits your business. Read reviews, calculate ownership costs and check availability in your area. Remember that, unlike personal auto loans, business auto loans may include restrictions on the vehicle’s age, mileage or where you can purchase the car. For example, your lender may not allow you to purchase a vehicle from a private seller.

4. Get pre-approved for a business auto loan

Next, get a business auto loan pre-approval letter from your lender. Doing so is essential because it can help you:

• Find the best rate: The pre-approval process lets you shop around for the best car loan rates without hurting your business or personal credit because most pre-approvals are done with soft credit pulls.

• Firm up your budget: While you can determine how much you think you can afford with a basic calculator and some financial information, a pre-approval gives you a specific borrowing limit based on your qualifications.

• Build more negotiating power: Walking into a dealership with a pre-approval letter lets your salesperson know you’re serious about buying a car and have the financing to pay for it. If they aren’t willing to haggle over the price to match your budget, you can walk away and go to another dealership.

How to get pre-approved for a car loan varies by lender. Normally, though, you’ll need to provide general financial information, such as your business income and business and personal credit scores. You can get pre-approved for a small business auto loan from three different types of lenders:

• Traditional lenders: Banks, credit unions and the Small Business Association (SBA) are traditional lenders that generally offer the most competitive rates with flexible payment terms. However, these lenders tend to have more restrictions on the age and mileage of the vehicle you purchase.

• Online lenders: If you can’t get favorable loan terms from a bank or credit union, online lenders may be a good option. Fintech companies and other online lending platforms often offer flexible payment terms with more relaxed qualifications than imposed by traditional lenders. However, they may charge higher interest rates and fees in exchange.

• Alternative lenders: If you have a new business with thin credit, have a poor credit score or lack collateral for a secured loan, you can skip banks altogether and opt for alternative lenders like private investors. These loans are often more flexible with fewer restrictions on what you can use the money for, but you’ll pay higher interest rates and repayment terms may be short.

5. Compare pre-approval offers from at least three business auto loan lenders

When you have at least three pre-approval offers, choose the best one for your financial situation. Then, take the pre-approval letter for the offer you plan to accept when you shop for vehicles as proof of financing. To choose a lender, compare the following:

• Annual percentage rate (APR), which includes the interest rates and additional fees

• Loan amount

• Monthly payment

6. Submit your application for a business auto loan

Once you select the vehicle you want to purchase and negotiate a final price with the dealership, submit your business auto loan application. This step requires substantial paperwork and documentation. Each lender is different, but expect to include the following in your application:

• Employer Identification Number (EIN)
• Social Security number of all business owners
• Business bank statements
• Business tax returns from at least the previous year
• Profit and loss statements
• Cash flow statements
• Balance sheets
• Personal documents related to your personal income and credit history

Business auto loan vs. personal auto loan: Which is better?

If you’re considering buying a car for your small business, you’ll need to determine whether a business auto loan or personal auto loan is the better financing option. Ultimately, the answer depends on your situation, so familiarize yourself with the pros and cons of each before making a decision.

Business auto loan pros and cons

Business auto loans are better than personal auto loans in a few key ways:

• Tax benefits: The IRS allows you to deduct the cost of owning and operating any vehicle used solely for business purposes. This includes the interest on a business auto loan.

• Ability to build business equity: Business equity refers to the value of what the business owns outright. Once you pay off the vehicle, it belongs to the business. Having more business equity helps you appear more creditworthy to future lenders.

• Lower interest rates: Many lenders offer businesses better rates than they offer consumers in personal loans.

However, business auto loans do have a few drawbacks:

• Stricter credit requirements: Many lenders have more stringent credit requirements for business loans than personal loans. A personal auto loan may be better if your business has poor credit or is too new to have an extensive credit history.

• Restrictions on what vehicle you can purchase: Business auto loan lenders tend to place restrictions on a vehicle’s age or mileage, or the type of dealer you can purchase from.

Personal auto loan pros and cons

Taking out a personal auto loan instead of a business auto loan has some advantages:

• More vehicle options: Personal auto loan lenders typically don’t restrict you to newer, low-mileage cars, so you’ll have more options.

• Ability to build personal equity: Personal auto loans are in your name instead of the business so you’ll earn personal equity on the vehicle.

Unfortunately, using a personal auto loan instead of a business auto loan may have some costly downsides:

• Higher rates: Personal auto loans often come with higher interest rates than business auto loans.

• More complicated tax treatment: With a personal auto loan, you can’t deduct the interest rate from your taxes like you can with a business auto loan. However, if the entire cost of the vehicle is treated as a business expense, then you get to deduct far more than just the interest.

• Commingling of personal and business credit: It’s best to keep business and personal expenses separate in case the IRS audits you or your business. Additionally, mixing business and personal finances may sacrifice the personal liability protection that you normally get from having an incorporated entity (like an LLC).

What is a qualified commercial clean vehicle credit?

The qualified commercial clean vehicle credit is a 2023 tax credit that applies to business purchases of electric vehicles (EVs) and fuel cell electric vehicles (FCEVs). The tax credit was created to incentivize businesses to purchase more fuel-efficient cars. Under the tax credit, businesses purchasing a qualified vehicle weighing 14,000 pounds or less can earn up to $7,500 in tax credits. For vehicles over 14,000 pounds, a business can earn up to $40,000.

To qualify for the tax credit, the vehicle must:

• Be made by a qualified manufacturer
• Be used solely for business purposes
• Be used primarily in America
• Be intended for public roads or mobile machinery
• Be a plugin or fuel cell motor vehicle

This tax credit is nonrefundable, so while it lowers your taxable income, you won’t receive a refund.

How to claim the commercial clean vehicle credit on your business tax return

The commercial clean vehicle credit is new for the 2023 tax year, and the IRS hasn’t released directions for how to claim it on your business tax return.

Are there any business auto loans without personal guarantees?

Business lenders often require personal guarantees, which are loan terms that require an individual, such as a business owner, to take personal responsibility for repaying the loan in case of a default. However, there are a few instances in which you can get a business auto loan without a personal guarantee:

• Your business has excellent credit

• You have a sizeable down payment for the loan

• The collateral is sufficient to cover the entire amount of the loan

There are two types of personal guarantees:

• Unlimited guarantees, which require the guarantor (the individual responsible) to repay the full amount of the loan

• Limited guarantees, which limit the amount the guarantor repays to a percentage of the total debt. This is typically used when there is more than one business owner.

Can you get a business auto loan with bad credit?

You can get a business auto loan with bad credit, but your options will be limited. In most cases, you’ll pay more in interest, be required to put down a larger down payment or be limited to certain lenders.

Summary of Money’s how to get a small business auto loan

If your small business needs a vehicle, consider a small business auto loan. While you can use a personal auto loan to purchase a car for your small business, you’ll miss out on better rates and potential tax benefits, such as the ability to write off loan interest and the commercial clean vehicle credit.

Having the operational resources you need is crucial to setting your business up for success. If you need more funding for your business in addition to a business vehicle, check out the best small business loans.