There are different types of business loans used to secure funding for various aspects of running a company. One common type of loan is a commercial auto loan. It is similar to borrowing money to buy equipment but specifically used for vehicles. If you plan to buy a truck, car, or any automobile for your business, it is essential to understand how commercial auto loans work and how to apply.
How do commercial auto loans work?
A commercial vehicle loan is quite similar to its consumer counterpart. Whether you borrow money from a bank or use an online lending service, the vehicle you purchase becomes collateral. As such, there is no need to sign additional paperwork promising to offset your unpaid debt with other business assets.
Moreover, unlike other unsecured loans, it is possible to pay lower interest rates because the built-in collateral reduces the lender’s risk. But depending on the lender, the terms of repayment may vary. For example, some lenders require borrowers to give a down payment before financing the rest of the cost. Restrictions may also apply according to the vehicle’s age and accumulated mileage.
Since it is a business loan, the lender will still approve based on your business credit score. If you do not have a business credit rating, the lender may even require some form of personal guarantee.
What are the requirements to get a commercial auto loan?
The documents required are straightforward and relate to your business, such as business registration, license, incorporation documents, and the like. In addition to proof that you own the company, you will also need to provide financial records such as tax returns. Lastly, a business plan detailing why you need to purchase a vehicle and how you intend to use the asset may be necessary as well.
For applicants without an established credit history, you could be asked to provide personal details such as your social security number and income proof. That said, these requirements vary from one lender to another. It is best to inquire in detail so that you can prepare adequately before sending in your application.
Will you get approved even with bad credit?
Lending companies will have offers available for individuals with limited business credit or bad personal credit history. However, you may not have as many options available. Also, interest rates and fees could be higher. If it is too risky on your part, it may be better to work on your credit rating first before considering applying for a commercial auto loan.
What happens if you cannot pay the loan anymore?
For loans without a guarantee, the vehicle automatically gets repossessed as a result of non-payment. On the other hand, loans, where you submitted a personal guarantee could damage your credit history. While you could use other assets to pay the debt, the negative impact will still reflect your credit report.
Indeed, commercial auto loans are key to acquiring vital assets for business operation. But before you apply for a vehicle loan, consider your company’s current financial standing and ensure that you can repay on time.