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Small Business Auto Loan With or Without Personal Guarantee

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Small Business Auto Loan With or Without Personal Guarantee

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How to Get a Business Auto Loan

What Is a business auto loan?

For business owners, it’s important to keep your business and personal expenses, investments, and assets separate. The same rule of thumb goes when it comes time to finance business cars and trucks. Business auto loans are similar to personal auto loans but differ because they are extended to businesses for company vehicles. This means that the business is responsible for making payments. There is usually a personal guarantee for sole proprietors or other types of businesses. Hence, even though the loan is extended to a business, the business owner or guarantor is responsible for repayment. Business auto loans are sometimes referred to as commercial auto loans. Most banks, credit unions, and lenders can offer business auto loans. It’s wise to get pre-approved before starting your search. To understand what you might qualify for or what steps you can take to land a more competitive loan, check your SMB score!

How does a business auto loan work?

Auto loans are secured loans - and business auto loans are no different. Since the vehicle secured the loan, the vehicle will need to meet loan parameters. 

Here’s what we mean. If you’re pre-approved for $35,000 - congratulations! But this does not mean you can buy any $35,000 vehicle. Chances are there are loan-to-value restrictions, year model restrictions, and other parameters around the loan. You can often purchase a vehicle with a business auto loan with no money down, but if the vehicle does not align with the loan to value parameters, you’ll likely be required to put up a down payment. Hence why lenders offer pre-qualification before pre-approval. It’s normal practice to get pre-qualified, then purchase the vehicle of your choice. Once you have a contract that shows the deal structure, the lender can send the loan to underwriting for final approval. It’s not until after the underwriting process that the loan is approved. It’s smart to clear underwriting before driving the vehicle off the lot. You can unwind a deal in many states without taking the vehicle home. 

Once approved for a business auto loan, you’ll need to make payments (usually on a monthly schedule). Most business auto loans come with a fixed interest rate, so payments should be fixed every month. If there are no prepayment penalties, you can repay the loan early, either little by little or in a lump sum, to save on interest. Until the loan is paid, the lender will be the legal lienholder, and the business will be the registered owner. Therefore if you go to sell the vehicle, the lender must be satisfied to release interest and ownership. Ensure proper insurance on the vehicle, especially while it’s financed. Insurance can work with the lender in an accident to ensure the loan is paid.

Tip: Business auto loans and vehicles can be tax deductible. Track your expenses (interest payments, vehicle payments, registration, maintenance, etc.) and consult your accountant when it’s time to file!

Where can I get a business auto loan?

Most banks and credit unions offer business auto loans. With the lending space growing, you may even be able to secure a loan from an online lender. The dealer may offer business financing options if you purchase a commercial truck. Sole proprietors or individuals with fictitious business names can also use a personal auto loan. This is common since the vehicle may be used for business and personal use. If you go this route, make sure the loan is paid from the appropriate accounts (i.e., business or personal) so that when it’s time to deduct taxes, the vehicle can be connected to the business. 

Does a business car loan affect your credit score?

Most business loans (especially for small businesses) consider personal credit scores. With time, your business can develop a credit score, which can eventually be used for loan decisions. The short and sweet answer to this question is yes, business car loans can affect credit score (as any loan can). When you first take out the loan, your utilization increases resulting in a potential credit score dip. Plus, your credit score was likely pulled, which can also cause a slight dip. If you make on-time payments, your credit should recover; over time, it can improve from the positive mark on your credit report. Monitoring your personal and business credit can help you better understand the impacts of loans and financial decisions. Visit mySMBscore to explore financials through the eyes of a lender.

Can I get a business auto loan if I have bad credit?

Bad credit business auto loans do exist but are usually best avoided. Unsure of how to financially position your business to qualify for an auto loan? Take advantage of mySMBscore to gain actionable insights to help you qualify for a business loan. 

What's the difference between a business auto loan and a personal auto loan?

While the structure of a business and personal auto loan is nearly identical, there are some advantages and differences between a business auto loan. Business auto loans offer reduced personal liability and increased tax benefits. For expensive commercial vehicles, businesses may access longer repayment periods than traditional auto loans. 

Should I lease or loan my commercial vehicle?

It depends on the circumstances. There is less responsibility attached to a lease but more restrictions. A lease may not be the best option if you drive the vehicle a lot. However, a lease may be good for around-town driving or short-term use. You’ll want to consider the mileage you’ll be driving the vehicle to determine details such as leasing versus purchasing and how many years the vehicle should last. The anticipated lifespan of the vehicle can impact how many years it should be financed. 

Can I get a business auto loan without signing a personal guarantee?

Well-established businesses may be able to get a business auto loan without a personal guarantee. Applicants with a high credit score may not need a personal guarantee but some lenders require this regardless. Since the vehicle is used as collateral, the lender has something to collect in the event of default. However, it’s not unusual for a personal guarantee to be required. 

There are only a handful of companies that offer an auto loan without a personal guarantee, Ally Bank is one of them. Ally Bank offers financing options such as a commercial line of credit and traditional loans. The commercial line of credit is typically best for purchasing many vehicles. With Ally, if your business qualifies for financing without the owner's guaranty, you can obtain financing in the business name only. See Ally for more information.

Business auto loan vs. leases

Purchasing a vehicle (even with financing) offers much more freedom for business owners. However, it’s not always the best decision. When you factor in the decision between leasing and purchasing, consider more than the monthly payment. Consider factors such as the predicted mileage the vehicle will be driven. You want to ensure the vehicle has a good chance of lasting through the life of the loan so you do not end up with a damaged vehicle that you still owe. Let’s compare buying versus leasing for business owners:

  • Payments: Leasing can offer lower monthly payments.
  • Maintenance: Most leases include vehicle maintenance. New car purchases may include maintenance as well. 
  • Mileage: Leases restrict mileage. If you exceed mileage, you can be charged per mile.
  • Modifications to the vehicle: Leased vehicles cannot be modified. 
  • Tax benefits: Leasing and financing a vehicle should have equal tax benefits. 

How do you get a business auto loan?

To get a business auto loan, you should start by getting pre-qualified. If you’ve already selected the vehicle you intend to purchase, submit the information with your application to expedite the process. Check with your primary bank or credit union to see their offer. Before you apply, you can examine your SMB score to identify ways to land a more competitive loan or expand your options. 

Do I need to put money down to get a business auto loan?

Getting pre-qualified is the best way to know if you need to put money down. Remember that down payment requirements for auto loans can vary depending on the specific vehicle and deal structure. It’s not unlikely to purchase a commercial vehicle with no money down. 

What are some alternatives to business auto loans?

As we’ve discussed, business auto loans can come with strict parameters. Businesses may be looking to purchase older vehicles or vehicles that do not meet the requirements. If you need an alternative way to finance a business or commercial vehicle, consider a personal loan or access a business line of credit. To explore various financing offers - visit mySMBscore!

At mySMBscore, business owners can check their SMBscore and unlock key financial drivers lenders use, all with no credit impact. Our user-friendly platform allows business owners to identify ways to improve their credit scores and gauge the likelihood of qualifying for a line of credit. The SMBscore was developed to create an industry-specific, tailor-made risk assessment that can be used to determine the financial stability of small and medium-sized businesses (SMBs). Our score represents the risk of a company having financial difficulties in the next three years, thus empowering lenders and business owners. With access to crucial lending metrics, you can use the knowledge to unlock the best loan offers for your business. 

Rev your engines business owners. . . unlock insights to accelerate the ability to secure the most competitive business loan offers!

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