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A Guide To Automotive Business Loans

Written by Allison Martin

Allison Martin is a personal finance enthusiast and a passionate entrepreneur. With over a decade of experience, Allison has made a name for herself as a syndicated financial writer. Her articles are published in leading publications, like, Bankrate, The Wall Street Journal, MSN Money, and Investopedia. When she’s not busy creating content, Allison travels nationwide, sharing her knowledge and expertise in financial literacy and entrepreneurship through interactive workshops and programs. She also works as a Certified Financial Education Instructor (CFEI) dedicated to helping people from all walks of life achieve financial freedom and success.

Updated January 23, 2024​

6 min. read​

Are you planning to purchase a commercial vehicle or expand your fleet? Either way, you’ll need to understand how automotive business loans work to ensure you get the best deal.

Here’s what to know about this form of financing, along with the key benefits and drawbacks worth considering. You’ll also learn how to decide which type of automotive business loan is best for you and tips to help streamline the application process.

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What are Automotive Business Loans?

Automotive business loans, or commercial auto loans, are a form of financing that allows you to access capital to purchase vehicles for business purposes. These loans can be used to acquire cars, trucks or other commercial vehicles.

How Do Automotive Business Loans Work?

Automotive business loans are secured loan products from select banks, credit unions and specialized lenders. Lenders generally require a good credit score to qualify for funding and get the best terms. A lower score doesn’t mean you won’t get approved for financing, but you can expect less favorable loan terms.

You’ll also need proof of business ownership, registration, and detailed financial documentation for your company. More on this shortly.

If approved, the loan amount and repayment terms are based on factors such as the price of the vehicle, your credit score, and your business’s financial health. Typical loan terms vary between 48-72 months, but some lenders may offer longer or shorter terms.

Understanding Different Types of Automotive Business Loans

Automotive business loans come in four forms – equipment financing, lines of credit, invoice financing and merchant cash advances. Below is a closer look at each option.

Equipment Financing

Equipment financing is a loan specifically tailored to help businesses acquire the vehicles, machinery and equipment they need to operate. With this financing option, the equipment you purchase acts as collateral for the loan, reducing the risk for the lender. Consequently, you may be able to secure better interest rates and repayment terms when compared to other types of loans. Equipment financing can be helpful when you’re looking to expand your fleet or replace outdated vehicles.

Lines of Credit

A line of credit offers a flexible way to access funds for your automotive business. You’ll get access to a pool of cash – or preset credit limit – and can draw funds as needed. You’ll only pay interest on the amount you use, which is beneficial if your company experiences fluctuating cash flow or unexpected expenses often arise. Lines of credit are typically unsecured, meaning they don’t require collateral but can come with slightly higher interest rates.

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Invoice Financing

Invoice financing could be ideal if your automotive business has a high volume of outstanding invoices. It involves selling your unpaid invoices to a lender at a discount in exchange for cash. Invoice financing helps you maintain consistent cash flow while waiting for customers to pay. Once the customer pays the invoice in full, you’ll receive the remaining amount minus the lender’s fees.

Merchant Cash Advances

A merchant cash advance (MCA) is an alternative form of financing that caters to companies with consistent credit card sales. With an MCA, you receive a lump sum of funds upfront, and a percentage of your daily credit card sales are remitted to the lender over time to repay the outstanding balance. This form of financing can help satisfy immediate cash needs. They often come with higher fees and interest rates than other types of loans. So, carefully weigh the benefits and drawbacks before choosing this option.

The Benefits of Automotive Business Loans

Automotive business loans have vital benefits to remember as you explore your options.

Boosting Cash Flow

Automotive business loans can be a great way to improve your cash flow. Acquiring a loan allows you to purchase new or used vehicles for your business without tying up large amounts of capital upfront. By spreading a vehicle’s cost over time, you can improve your cash flow, which fosters financial stability.

Financing for Business Expansion

Investing in additional vehicles can enable your business to expand operations, reach new clients and increase revenue. And since you don’t have to dip into your reserves to purchase commercial automobiles, you can grow your business without putting excessive strain on your budget.

Meeting Unexpected Expenses

Unexpected expenses can arise in any business, and having access to funds through a business auto loan can help you quickly adapt to these challenges. To illustrate, assume one of your fleet vehicles needs a significant repair or replacement. A loan can provide the necessary funds in a timely manner and avoid potential disruptions to everyday operations.

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Risks and Challenges of Automotive Business Loans

As with any debt product, this form of financing also has its fair share of drawbacks.

High-Interest Rates

One of the primary challenges you may face when obtaining an automotive business loan is steep borrowing costs. Interest rates might be higher than traditional loans, especially if you have a lower credit score or financial profile lenders deem risky. And you may find it challenging to repay the loan over time, which could strain your business financially.

Risk of Losing Collateral

Securing an automotive business loan may require you to provide collateral, such as business assets or personal property. This ensures lenders can recoup their investment if you fail to repay the loan. Should you default on the loan, your collateral may be at risk of being seized by the lender.

Impact on Credit Score

Obtaining an automotive business loan, like any other type of loan, can impact your credit score. Applying for a loan may result in a hard inquiry on your credit report, which can temporarily lower your credit score. Furthermore, your credit score could tank if you don’t pay your loan on time or default on the loan agreement. This could make it more difficult and costly for you to secure financing for your business in the future.

Picking the Right Automotive Business Loan

Before shopping for an automotive loan, it’s vital to understand what to look for.

Factors to Consider

Start by considering the interest rate of the loan. A lower rate typically means a lower overall cost. Still, it’s essential to understand the difference between fixed and variable rates. Fixed rates remain constant, while variable rates can fluctuate over time.

Another important aspect to consider is the loan term or repayment period. Shorter terms may lead to higher monthly payments, but longer terms could result in higher overall costs due to extended interest payments.

Also, be mindful of the lender’s reputation and any potential fees associated with the loan. Some lenders may require origination fees or prepayment penalties, so thoroughly review the loan terms before committing.

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Comparison Between Different Loan Options

It’s essential to compare different automotive business loan options to find the best fit. Start by reviewing the loan amounts each lender offers and the required collateral, if any. Also, consider the minimum credit score requirements, as they can vary widely between lenders. Some lenders have more flexible credit score minimums, while others cater to borrowers with higher scores.

It’s also helpful to look at the approval process and funding speed. While some lenders offer next-day funding, others may take longer to fund your loan. If your business needs the loan urgently, prioritize lenders with fast approval and funding timelines.

Identifying Your Business Needs

Before applying for an automotive business loan, take a moment to identify your business’s specific needs. Clearly define the purpose of obtaining the loan – whether it’s for expanding your fleet, purchasing new equipment or simply refinancing an existing loan. By establishing a goal, you can better tailor your loan search to your requirements. Also, evaluate your company’s financial health and preparedness for taking on new debt.

The Application Process for Automotive Business Loans

When you’re ready to apply for funding, here’s what you need to know.

Requirements for Application

Before you begin the application process, it’s essential to understand the requirements for obtaining an automotive business loan. First, establish a budget considering factors such as the down payment, monthly payments, lender or dealer fees, taxes and insurance. Ensure that your business has a good credit score, as lenders will analyze your business’s credit history before approving any loan.

It’s also essential to determine the type and number of vehicles that your business needs. Some lenders may have specific restrictions regarding the age or mileage of the vehicles.

Documents Needed for Application

You’ll need to gather and provide several documents to help the lender evaluate your company’s financial situation. The lender may request:

  • Business tax returns from the past two years
  • Profit and loss statements
  • Balance sheets
  • Bank statements
  • A copy of your business license
  • Proof of insurance for the vehicles you wish to purchase

Make sure that all the documents are accurate and up-to-date to prevent any delays in the approval process or an inadvertent denial.

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The Approval Process

After submitting your application, the lender will review your provided information and documents. This may involve verifying your business’s credit score, analyzing your financial statements, and assessing the value of the vehicles you plan to purchase.

Upon approval, you’ll receive a loan offer detailing the terms, interest rate, and repayment schedule. Carefully review the loan offer and confirm it aligns with your business’s needs and budget constraints.

If you’re satisfied with the proposed terms, you can finalize the loan agreement, receive the funds and proceed with purchasing the required vehicles for your business. Remember to keep up with the agreed-upon payments to maintain a positive relationship with the lender and avoid any negative impact on your business’s credit score.

Tips to Successfully Manage Your Automotive Business Loan

Once the loan is approved and funded, follow these tips to manage it effectively.

Proper Financial Management

Develop a solid business budget to keep track of your income and expenses. Prioritize your loan payments within your budget to avoid defaulting and damaging your credit score. Regular financial monitoring will help you identify areas where you could cut costs or find growth opportunities.

Leveraging Loan for Business Growth

To maximize your automotive business loan, focus on utilizing it for business growth. Identify avenues contributing profitable revenue streams, such as investing in new equipment or expanding your inventory. Also, consider using the funds to improve your marketing strategies and target a larger customer base.

Timely Repayment of Loan

Repaying your loan on time is essential to maintain a good credit score and foster a strong relationship with your lender. Familiarize yourself with the loan terms and repayment schedules, and consider setting automatic transfers to ensure timely payment.

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