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Key Points:
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Business auto loans provide essential financing for businesses to acquire vehicles necessary for their operations.
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Potential tax benefits and deductions associated with business auto loans have complexities.
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With the right type of loan, businesses can acquire the vehicles needed for growth and operational goals.
Getting your business on the road to success often requires reliable transportation. For small business owners, a business auto loan can provide the financing needed to purchase a vehicle or multiple vehicles essential for your operations. Whether you need a delivery van, a service truck, or a company car for your sales team, a business car loan can help you acquire the right vehicle to meet your business needs.
...yes, that’s right, Congress refers to regular passenger cars and smaller SUVs as luxury vehicles...
What is a business vehicle loan?
A business vehicle or auto loan is a type of financing designed for businesses to purchase vehicles for commercial use. Unlike personal auto loans, which are used to finance vehicles for personal use, business auto loans are secured by the vehicle being purchased. This is known as a secured loan. Generally, this means the lender has a claim on the vehicle if the borrower defaults since the vehicle is the collateral.
The loan’s security structure makes business auto loans more attractive to lenders, often resulting in lower interest rates and more flexible terms compared to personal auto loans. Business auto loans can be used for a wide range of vehicles and to purchase or lease transportation for your business.
Suppose you structure your business as a limited partnership, limited liability company (LLC), cooperative, corporation, or nonprofit. In that case, you can protect your personal assets and credit by purchasing a vehicle in your business’s name. If your business is structured as a sole proprietorship or a general partnership, as the owner, you are personally liable for the company's debts and liabilities despite the loan being in the name of your business.
A crucial difference between a personal auto loan and a business auto loan is that the lender can dictate many aspects of the loan, such as the type of vehicle, repayment terms, and how the vehicle may be used.
Business Loan Providers
- Personal loan & cash advance marketplace
- Qualify for up to $40,000
How Business and Commercial Auto Loans Work
Since a secured loan is typically repaid in fixed monthly installments over a set term, a business and commercial auto loan is an excellent option for businesses that lack cash on hand. Opting for a business auto loan can preserve working capital for other essential business operations, such as inventory purchases, marketing, or expansion projects.
A business auto loan is a good financing option if a business needs a car, van, or light-duty truck. However, a specialized equipment loan may be required if a business needs a heavy-duty vehicle for operational purposes.
Certain lenders permit you to secure a loan under your company’s name; however, you might need to provide a personal guarantee. This means your personal assets could be at risk if you fail to make the loan payments on time. Additionally, some lenders may mandate that the vehicle be used exclusively for business purposes, although proving otherwise is extremely difficult.
You can receive a business auto loan from a bank, credit union, or online lender if your business meets the eligibility requirements. Business auto loans often have different eligibility requirements than personal vehicle loans. Similarly, business auto loan rates vary significantly compared to personal loan interest rates and depend on factors like your business credit score and the loan term. Qualifying for a business loan also involves stricter criteria compared to a consumer or personal loan.
The repayment term can range from 1 to 8 years, depending on the type of vehicle and the lender’s loan conditions. At the end of the loan term, the business owns the vehicle outright, providing an asset and equity that can be used for collateral in future financing or sold if needed.
The Benefits of Commercial Vehicle Financing for Small Businesses
There are various beneficial reasons for a business to purchase a car through commercial vehicle financing.
Vehicle Tax Benefits & Deductions
Many business owners, self-employed, and contractors first think of tax benefits and deductions, but these benefits have complexities. Make sure you research this more independently by reading up on the federal and state tax laws surrounding vehicle expenditures and deductions and always consult a tax professional on the most tax-advantageous approach for your specific circumstances.
Since the premise of this article is commercial vehicle financing, let’s consider you want to finance a vehicle for business purposes. Many people have heard about what’s previously been referred to as the “Hummer tax break” or the “Hummer deduction” as a loophole for wealthy business owners to buy an SUV and write it off. The reality is not that simple.
According to section 179 of the US tax code introduced in 1986, businesses can write-off the expense of a vehicle with a gross vehicle weight rating (GVWR) of over 6,000 lbs and under 14,000 lbs. The GVWR is the vehicle's total weight plus the expected weight of the passengers, cargo, and fuel. To qualify for this tax break, the vehicle must be used for business purposes at least 50% of the time. Furthermore, the deduction is capped based on the amount of use for business purposes vs personal use.
For the 2023 tax year, businesses could potentially write off $28,900 according to the business-use percentage. In 2024, businesses will potentially be able to deduct $30,500. While this is hardly even close to the price of a new vehicle, it’s still a nice tax break.
Vehicles with a GVWR of under 6,000 lbs fall under a different tax code. For these luxury vehicles — yes, that’s right, Congress refers to regular passenger cars and smaller SUVs as luxury vehicles — the deduction amount in 2023 was capped at $12,200. Currently, no change to this limit has been announced for 2024.
Using this type of tax deduction outright nulls the opportunity to deduct the depreciation value on upcoming tax filings. Deducting the depreciation value spreads the cost of the vehicle over its useful life by deducting a portion of its value each year.
Deducting a larger portion of the expense upfront has the advantage of making more cash readily available and avoiding the need for complex depreciation calculations over multiple years.
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Sole Proprietorship vs. Partnership: Which is Right for Small Business Owners
Other Benefits of a Commercial Vehicle Loan
Commercial vehicle loans also offer other unique advantages for businesses.
- Loans are specifically designed to fit your business needs, with fixed monthly payments and longer loan terms that provide flexibility in managing your cash flow. This allows you to focus on core business activities while financing the vehicles you need.
- Making on-time loan payments can help build your business credit history, potentially improving your credit score and giving you access to more favorable loan terms in the future.
- Commercial vehicle loans can increase your business’s efficiency by streamlining the process of acquiring the vehicles that drive your business forward.
Business Car Loan Eligibility Criteria
When applying for a business car loan, it’s important to understand the information you’ll need to provide. Banks or credit unions usually ask for information such as the amount of time your business has been in operation, vehicle specifications, if you intend to lease or purchase, the desired loan amount, and other operational and financial criteria by which your business will be assessed. To secure a loan, businesses must show they can abide by the terms. Lenders will assess eligibility criteria such as:
- A strong business credit score: Lenders assess your business's established credit by looking at factors like payment history, credit utilization, and debt-to-income ratio.
- Proof of financial stability: You'll need to demonstrate proof of business operations and financial stability through documents such as business tax returns, bank statements, and profit and loss statements.
- Collateral: As mentioned, the vehicle you're purchasing is collateral for the loan, providing the lender with some security, but some lenders may also ask for extra business or personal collateral.
- Down payment: A down payment—usually a percentage of the vehicle's purchase price—is typically required for a business auto loan.
This is a general idea of what you may encounter when applying for a commercial vehicle loan. When evaluating your credit request, lenders may consider other parameters to evaluate your worthiness as a borrower.
Comparison with Other Financing Options
Research various lenders and compare their offerings, such as interest rates, terms, and other conditions. It’s important to shop around and compare offers to find the best deal.
Here is a quick reference chart comparing the different financing options for business vehicles:
Each financing option has pros and cons, depending on the business’s specific needs, financial health, and long-term goals.
Personal Loan Providers
The Bottom Line
To fully leverage the advantages of any vehicle or equipment loan for your business, it’s crucial to maintain accurate use records and ensure the vehicle is primarily used for business purposes. Additionally, consider consulting with a tax professional to understand all available tax benefits and how to maximize deductions.
With the right type of commercial auto loan, business equipment financing, or business line of credit, small businesses can acquire the vehicles needed to support business growth and achieve operational goals.
By understanding the specificities of different types of loans and utilizing them effectively, small businesses can enhance their operational capabilities, manage finances more efficiently, and potentially expand their enterprise with the support of reliable transportation.
Proper financing preserves working capital, offers potential tax deductions, and creates credit-building opportunities, making it a strategic choice for businesses looking to grow and thrive.
What are the benefits of using a business auto loan?
A business auto loan has predictable payments, potentially lower interest rates compared to other financing options, and potential tax benefits through Section 179 deductions for qualified business vehicles.
What are the eligibility requirements for a business auto loan?
Eligibility for a business auto loan varies depending on the financial institution. Typically, lenders evaluate factors such as the amount of time a business has been operational, credit history, and financial standing to gauge its repayment capability. This assessment includes scrutinizing the business's income and financial records.
What is the "Hummer tax break"?
Section 179 of the U.S. tax code, also known as the "Hummer deduction," offers a valuable tax break for businesses by allowing them to deduct a significant portion of the cost of qualifying business property, including vehicles, in the year it's placed in service.
Article Topics
Auto Loans
Will is an expatriate from Arizona, USA, who studied Political Science at Arizona State University. As a passionate personal finance enthusiast, he combines his expertise with a keen interest in current events to create engaging and insightful financial content. Outside of his professional pursuits, Will enjoys the nostalgia of old-school video games, adding a unique touch to his multifaceted profile.
