If you’re looking to finance a vehicle for your business, a business auto loan may be a good option. The loan is typically collateralized by the vehicle, which means that the lender can repossess the vehicle if the loan is not repaid. Business auto loans may be used to finance the purchase of a new or used vehicle — including those modified for your business purposes — and the loan terms will vary depending on the lender.

What is a business auto loan?

A business auto loan is a loan that can be used to finance the purchase of a vehicle for business purposes. Just like a personal auto loan, the vehicle bought is used as security.

Some lenders may require that the vehicle be used exclusively for business purposes, and many require that the borrower have a minimum credit score — business, personal or both. The loan may also be personally guaranteed by the borrower, which means that the borrower’s personal assets may be at risk if the loan is not repaid.

How to get a business auto loan

To get a business loan, you’ll need to first do some planning. From there, it’s similar to getting a personal auto loan — though with a few more requirements.

  1. Set a budget: Whether you’re buying a new or used vehicle, you will need to determine the maximum amount you can afford to spend on a monthly basis. Also determine how much you’re willing to spend overall.
  2. Review your credit: Check your business and personal credit scores and reports to identify and dispute mistakes. It can take up to 30 days for a creditor to respond, so do it well in advance of when you want to buy. If your credit score is high enough and your report is relatively clean, you may qualify for a lower interest rate.
  3. Choose a vehicle: Compare your options to determine the type of vehicle you plan to finance. Some lenders may only finance new vehicles, for example, while others may have tight restrictions on the used vehicles they finance.
  4. Get preapproved: Shop around with at least three different lenders to determine which is willing to provide you with a business auto loan and what the terms are. Some lenders may require that you provide documentation proving you own the company.
  5. Provide documentation: You will need to provide your employer identification number or Social Security number, business bank statements, business tax returns, a profit and loss statement, cash flow statements and a balance sheet. You may also need to provide personal documents proving your personal income and creditworthiness.

Where to get a business auto loan

When shopping for auto loans for your small business, you have three main options: banks, online lenders and alternative lenders.

Traditional banks

Traditional banks typically offer loans with competitive rates and flexible repayment terms — however, they may have restrictions on mileage and vehicle age. Business auto loan interest rates can fall below 3 percent if you’re accessing funding through a bank. Bear in mind, the process can be lengthy and you’ll need to provide a lot of paperwork.

Online lenders

While not as strict as bank lenders, online lenders generally still require at least a good FICO credit score for the business owner, and may have some restrictions on vehicles that can be financed. You may find it easier to qualify, and the interest rate ranges are often comparable to a bank or credit union.

Alternative lenders

With alternative lenders, you’ll usually see interest rates start a little higher. But there are usually looser restrictions on age and mileage, and the process is much quicker.

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: If you need another type of working capital, a small business loan may be a better option. But often these come with higher fees and interest rates than a traditional business auto loan.
  • Personal loan: It’s not a great idea to use a personal loan to finance a business vehicle. These types of loans are typically more expensive than business-specific loan options.
  • Consumer auto loan: If the vehicle will be driven more for personal use, a consumer auto loan may be a better option. These can be easier to secure, but you put your personal credit on the line, rather than your business’s.
  • Leasing: You may be able to lease a car for your business rather than buy it. The car won’t be an asset your business can claim, but there are ways to incorporate the cost into your taxes. It may also be less expensive on a month-to-month basis.

Why you shouldn’t use a credit card

Using a credit card, business or otherwise, isn’t a choice for the most part. High transaction fees make most dealerships unwilling to allow them.

Credit cards are also very expensive compared to a loan. Rates are higher, both because of the nature of the product and because the vehicle doesn’t act as security.

The bottom line

Whether you’re looking to finance a vehicle solely for your business or one that will also be for personal use, take time to compare the options available to you. With business auto loan interest rates starting under 3 percent for borrowers with strong credit, it’s worth making sure you get the best deal.

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