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Everything You Need to Know About Business Auto Loans

A business auto loan, also sometimes called a commercial auto loan, essentially works as an equipment loan for business owners looking to finance a vehicle purchase.

If you're looking to buy a car or truck to scale your business, it's important to know how this type of loan works, what you need to qualify and what happens if your business can't repay the debt.

What Is a Business Auto Loan?

For the most part, business auto loans function similarly to consumer auto loans. When you borrow money to purchase a car or truck, the vehicle acts as collateral for the loan. This means that, unlike some other business loans, you may not have to sign a personal guarantee promising you'll pay back the debt with personal assets if your business defaults.

These loans also tend to carry lower interest rates than unsecured business loans because the built-in collateral reduces the lender's risk in the transaction.

Loan terms, however, can vary by lender. For example, while some lenders will allow you to finance up to 100% of the vehicle's sales price, others may require a down payment. You'll work with your lender to figure out loan amounts and restrictions on the age and mileage of the vehicle.

You can generally expect a repayment term similar to a consumer auto loan, with many commercial auto lenders offering up to 72 months.

Because it's your business borrowing the money, lenders will likely base your loan terms on your business credit history, not your personal credit history. If you haven't yet established a business credit history, you may need to provide a personal guarantee, which can affect your finances and personal credit history if your business defaults on the debt.

What Do I Need to Get a Business Auto Loan?

If you're considering a business auto loan, you'll need to provide several documents to the lender.

For starters, since you're borrowing the money through your business, you'll need to prove you own the company. This documentation may include a business license and registration, partnership agreements, articles of incorporation or other documents.

You may also be asked to share your employer identification number (or Social Security number if you're a sole proprietor), bank statements, tax returns, a profit and loss statement, cash flow statements and a balance sheet. You may even need to put together a business plan showing why you need the vehicle and how you'll pay back the loan.

If your business credit history isn't very robust, you may also need to provide your Social Security number, personal tax statements and bank statements, and other documents proving your personal income and creditworthiness.

Again, each lender may have different needs, so it's a good idea to reach out before you apply to get an idea of what you'll need to pull together.

Can I Get a Business Auto Loan With Bad Credit?

It is possible to qualify for a business auto loan if you have limited or no business credit history and bad personal credit. But your options will be limited, and you may end up paying higher interest rates and fees because your lender is taking on more risk.

Also, you'll likely need to provide a personal guarantee that you'll pay back the loan with your personal funds and assets if your business ends up defaulting.

Because of the high costs and the threat to your personal financial security, it may be worth working on rebuilding your credit before you apply. Alternatively, you may consider trying to find another way to finance a vehicle.

What Happens if I Default on the Payments?

If your business auto loan doesn't require a personal guarantee, and your company defaults on the debt, the lender can repossess the vehicle—potentially dinging your business credit history. In this situation, though, your personal credit history can make it through the process unscathed.

When you've provided a personal guarantee and your business defaults on the debt, the lender or a debt collection agency may choose to report the debt to the consumer credit reporting agencies, which will affect your personal credit report and scores.

If you can manage to pay back the loan using personal assets, you can minimize the negative effect the defaulted debt has on your personal credit scores. If you can't, the default can damage your scores and make it difficult to get approved for credit in the future.

Carefully Consider Whether a Business Auto Loan Is Right for You

A business auto loan may help you grow your business, but it's important to understand what's required and how it can affect your business and personal life.

Start by checking your business credit score and seeing where your company stands. Then, shop around and compare rates and terms from several lenders. If your business credit is in great shape, you may have no problems getting a business auto loan without a personal guarantee.

If your personal credit will be put on the line, consider the likelihood that your business will repay the debt on time. And if you have bad credit, ask yourself whether now is the right time to borrow or if it'd be better to wait until you can improve your credit score and reduce the loan's costs.

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