Business Car Finance Options: Which Is Right for You?
If your business is in need of a vehicle, then you’re probably wondering if it is better to buy or to lease. Buying a commercial vehicle has benefits like building equity and tax benefits, on the other hand, it can be difficult to pull together resources when purchasing a vehicle outright.
Fortunately, there are two commercial business financing options that can help you and your business. In this article, we will review both options for a commercial auto loan, analyze the terms and doe’s don’ts which will maybe help you decide which option is better for your business.
What is a commercial car loan?
Basically, a commercial loan is financing that is used only for purchasing a vehicle for your business.
One of the key benefits of a commercial car loan is that you don’t have to use your company’s cash reserve to pay for the vehicle upfront.
All you have to do is to pay back the commercial vehicle loan in monthly installments of the principal sum with added interest over the term of the loan.
These loans typically last for about 5 years but can also vary, depending on your qualifications.
Ownership
Because the lender of your commercial vehicle is listed as a lienholder of the vehicle, if you miss payments and go into default then the lender has the right to take back the vehicle.
On the other hand, if you clear the entire balance of the borrowed amount within the agreed term, the car’s title will be transferred to you. You will have full ownership of the vehicle and you will be allowed to trade it with another vehicle or even sell it.
Leasing
Most commercial vehicles have high depreciation rates. Commonly, their value drops for about 20%, and that’s why commercial vehicle finance leasing has become a popular method of financing for businesses that frequently buy or update vehicles. Basically, it is like renting a vehicle but for a long period of time. Another great benefit of leasing is that lenders don’t always require down payments.
When you choose a lease, keep in mind that it is for a set amount of time, which means the vehicle to be driven only a certain miles each year. This is known to be a deal-breaker, especially if you have to travel long distances for work, but you’re limited to the number of miles you can drive. As a result, you can buy additional miles to your expense.
When the lease is over, the lessee has two options:
- They can purchase back the vehicle by paying off the balance of the lease,
- Return it.
Loan rates and terms
The amount of the commercial vehicle loan you can borrow always depends on the financial situation of your business and most lenders will afford you up to 100% of the vehicle’s value.
As most forms of credit go, the best vehicle loans usually go to borrowers with strong credit histories and a proven track record of financial responsibility.
The terms of your vehicle loan typically last from 1 to 5 years, which allows you to make weekly or monthly payments. It all depends on the length of the loan and your business’s ability to pay it back.
If your business has a good credit score, naturally you will naturally be offered a lower commercial vehicle loan interest rate. For businesses with a poor credit history, lenders provide commercial vehicle financing with higher auto loan rates.
How to get a commercial vehicle loan?
Most importantly you need to be prepared if you want your business to get a commercial auto loan. Most lenders usually want to see your business and personal documents and these include:
- Partnership agreements
- Business licenses
- Profit loss statements
- LLC documents
- Tax returns
- Cash flow statements
- Bank statements
In order to make sure that you have the qualifications to fit their lending criteria, lenders will perform a risk assessment examination.
It is advised that you approach lenders with a loan proposal that details your business activities, and what the loan will be used for.
Keep in mind that most lenders will want to review your personal credit and finances.
Operating leases
When you agree on an operating lease, you agree to finance a vehicle for less than its useful life which can be from a few years to more than 10. With this kind of lease, the lessee is not responsible for the estimated value at the end of the lease. Basically, the vehicle is just returned back to the finance company. This is always useful for businesses with a higher turnover of vehicles.
Final word
Finding the right commercial vehicle finance for your business might take some time, searching and planning. Cars and other vehicles aren’t cheap, but the good news is that there is a lot of options to choose from. Spend some time to research your options, and you will surely, in the end, make the right decision.