How to Research and Apply for Business Auto Loans

January 27, 2012

If you need to learn how to get a business car loan, below are some steps to take. A business car loan can be an excellent way to secure a nice tax deduction, as well as help your business' credit score.

Make up a Loan Proposal
Just like when you first took out the loan for your business, you need a well written loan proposal to secure a business car loan. The vehicle will be business equipment, and you should treat it as such. The loan proposal should cover things such as why you want the loan, how much you need, how you will repay the loan and what you have for collateral. Sell your business to your lender. It should offer an overview of who you are, what you do and what your current and future income will be. A well written loan proposal is half the battle.

Research
You need to know what both your business and personal credit is before you go to your loan officer. Call around for the best rates, and make sure your business credit meets their minimum requirements. Too many inquiries to your credit will lower your credit score (as well as your business'). Try to use the same bank or lending party you used to secure the business loan, as you will get a much better rate.

Collateral
Decide what you can use to secure the loan. When you can offer the lender valuable equipment as collateral, you have a better chance of getting the loan. Collateral can be almost anything that is worth something, such as the business itself. It really depends on you.

Budget
Figure out how much you can afford to put down on the vehicle before you approach the lender. The time to decide how much you can afford to pay for the vehicle is before you see the lender. You will need to know what can be put down and what you need to finance.

Guaranty

If your business credit score is not great or the company is new, you may need to sign a personal guarantee for the loan. If this happens, you need a copy of your personal credit to make sure it is good. Most lenders require that the owner of a business has good credit before granting the loan. Get a good look at your personal score when you look at the business' score. Sitting in front of the loan officer is no time to find out you have a bad score. If the bank extends a car loan to a business or corporation, and that business subsequently closes or goes out of business--the bank has no recourse, except the possible repossession of the vehicle. There is no one to sue or send a collection agency after. That can make them reluctant to offer a loan.

How a Personal Guaranty Can Help
A personal guaranty gives the bank what a closed or defunct business cannot. A personal guaranty gives them you. If your business defaults on its obligation to repay the car loan to the bank, you will be the one the bank comes after to collect from. If you are unable to repay the loan, you will be the one the bank either sues or sends a collection agency after. In short, a personal guaranty means that you are directly responsible for repaying the car loan.

Other Considerations
Many entrepreneurs or business people form corporations or limited liability companies to avoid these kinds of scenarios, specifically, to protect from being held personally responsible for any business-related debts, loans or obligations. In fact, it is generally a widely held belief that you should never personally guaranty any type of loan, unless it is absolutely necessary.

Tips for Business Car Loans

An important aspect for any business operation is maximizing the use of capital. One obvious area is be securing a business car loan that has favorable terms.

Your Banking Advisor May Help
Many businesses create lasting, working relationships with financial institutions that help manage cash flow, assets and advise on aspects like business expansion and capital purchases. If your business has such a relationship, this should be your first stop when conducting commercial vehicle loan research. Here you should have a trusted advisor that will quote you a price while explaining all the aspects contingent upon executing the loan.

Get the Business Car Loan First
Most in-house finance departments at dealerships are designed for individual, personal consumer loans, which present a greater variety of requirements and options. If your business has already established a relationship with a financial institution, this should be your first place to look for a loan. If not, consider searching online for a business car loan. The Internet provides a wealth of choice and, with a little perseverance and time searching, you may find favorable terms that suit your needs.

Know Your Score
Before you do go to any financial institution or search online, obtain your credit report from the 3 major reporting agencies--Experian, Equifax and TransUnion. It is important to verify your business credit information before attempting to secure a loan. In the event there are disputable items in the report, you will fair far better correcting any mistakes before application rather than getting a surprise about adverse information from your loan originator.

Be Wary of Additional Fees
Always take the time to understand any accompanying fees. Many lenders offer what appears to be a great deal with low-interest charges. However, these same lenders may be making their profits off accompanying processing fees and other miscellaneous charges that may make the deal not as favorable as it first appears.

Longer Term Payments Can Cost You
Decide what length of contract time is best suited for your business. Although lower payments at longer contract times might look appealing, explore various payment plans that your business may benefit from in both the short and long run. There are different types of loans that provided for fixed-rates or adjustable rates. It's best to consult with your business accountant for advice on how to structure a loan for your ultimate benefit. Remember, the financial institution wants your business, and regardless the type loan you acquire, they will be making a profit. Therefore, do a little homework, consult with a financial expert and you'll arrive at the type loan that will fit your needs.

Know the APR
Sometimes, it is difficult to wade through all the terms and figures found in any commercial auto loan. The interest rate is important, but make sure you discover what the annual percentage rate (APR) for the loan actually will be. This determines the entire cost for the loan, including all accompanying fees and closing costs.

0% Down Isn't as It Seems
Beware of marketing terms like "0 Down" financing. Although putting no money down on a purchase this sizable may seem attractive, doing so will have an overall effect upon not only the interest rate, but the size of monthly payments. Remember, the lower the amount financed translates into shorter payment periods, resulting in a lower cost loan. Determine the monthly amount of payment your business is willing to accept before agreeing to loan terms. If your payment ability is flexible, always choose a higher monthly payment for a shorter period, which will result in substantial overall savings.

Maintenance Agreements May Be Financed
A great many dealers offer "free" maintenance with the purchase of certain vehicles. Sometimes these "free" maintenance agreements have already been included in the overall price of the car. Also, be aware of financing other associated costs, like licensing and title fees, that if paid for separately may reduce your monthly payments. There are always certain added-on extras that you should evaluate carefully before agreeing that they be part of your commercial auto loan agreement.

Ask Other Business People
One of the easiest and fastest ways to find a good business auto loan lender is to simply ask other entrepreneurs or business people. Chances are that many of them have either purchased a vehicle using a business auto loan or have also inquired about it.

If you know someone in the construction industry, they could prove to be extremely useful in your search. Construction companies always need new vehicles to replace older vehicles or vehicles that are no longer roadworthy. Many times, they use a business auto loan lender to make their purchases. So, they have probably dealt with more than one or two.

Visit a Large Truck Dealership
Although you might not be searching to purchase a truck, dealers that specialize in large pick-up trucks or commercial trucks do a significant amount of their business with other businesses. People working at these dealerships are generally very familiar with how business auto loans work, and may be willing to recommend a good business auto loan lender.

More than 1 Can Attract Greater Savings
If your business plan is to acquire several vehicles throughout the course of stepping up growth, explore the possibilities toward making a "fleet" purchase, where multiple vehicles purchased will get you greater discounts.

Commercial Car Loan with No Collateral

One type of commercial car loan which your business might consider is a no collateral loan. Due to the advantages offered by a no collateral car loan, your business' credit score will likely need to be very good, or else be backed by a personal guaranty. Car loan rates may also be higher, to compensate for the lack of collateral. Despite this, no collateral loans are often a worthwhile choice.

Overview of a No Collateral Car Loan
A no collateral loan is the same concept for both personal and business loans. Collateral is an item of value which is used to back a loan. If you fail to make payments on the loan, the lender has the right to repossess whatever was put up as collateral. No collateral loans mean that collateral is not placed against a loan, so approval for the loan is based more heavily on other factors, such as credit history.

Advantages of a No Collateral Car Loan
The most obvious advantage of a no collateral loan is that no valuable item owned by the business can be repossessed should payments fail to be made. This can provide some peace of mind, and provides an insurance of sorts, if your business becomes suddenly unable to make payments. Another advantage of a no collateral loan is that the approval process is fairly quick. This is because the process of determining the value of a collateral item is unnecessary.

Disadvantages of a No Collateral Car Loan
Since no collateral loans offer less security to a lender, they may compensate by requiring a large down payment or increasing interest rates. Therefore, if you are certain that your business will be able to make payments and see the loan completely repaid, you may be able to find better rates on loans if you can offer collateral.

Business Car Loans with Bad Credit

If the business which is trying to get a car loan has a poor credit history, or if you are a new business which has not yet built credit, it is possible to secure a loan with a personal guaranty. A personal guaranty is similar to a cosigning on a student loan, in that an individual agrees to be secondarily responsible for the repayment of the loan. In both cases, it is the credit of the person giving the personal guaranty, or of the cosigner, which matters.

Advantages of Bad Credit Business Car Loans
Bad credit loans are generally not thought of as advantageous, and with good reason. High rates and severe penalties make bad credit loans a thing to avoid if possible. However, getting a bad credit business car loan can also be thought of as an opportunity. Repaying a car loan responsibly can help build the business' credit back up over time. A poor credit score can be rebuilt in only a couple of years or less, at which point the business is free to refinance and will have a much easier time finding loans in the future.

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