Delivering products, providing transportation for service providers, running business events—small business owners need a vehicle for all types of reasons to help their company run smoothly. You may be able to purchase a company vehicle with business credit, which not only capitalizes on your good standing but can continue to improve your business credit down the line.
The most important thing to know about buying a vehicle with business credit? A company car needs to be for business use, not for personal use.
Be sure that if you’re using your business credit to finance a vehicle purchase, the car is necessary to the operations of the business. You can use your business credit history to gain favor with lenders and secure an auto loan.
Key points on buying a company car with company credit
- Small business owners may be able to purchase a company vehicle using business credit.
- Building up business credit before applying for an auto loan is important.
- Small business owners may use a corporate credit card, small loans, or other lines of credit to gradually build up business credit.
- Lenders will want to see financial evidence of a successful business and the need for a company vehicle.
- The lender may consider both business and personal credit, especially for a sole proprietor or startup.
How to buy a vehicle with business credit
The first step for your small business is to structure it as a separate legal entity. This helps you keep personal assets and records separate from your company dealings. Once you do this, the Small Business Administration says you can apply for a tax identification number or employer identification number (EIN). The Internal Revenue Service (IRS) uses your tax ID number or EIN to identify employer tax accounts.
These are the first steps to building business credit, so that you can begin to demonstrate that your business is a responsible borrower. This is important when planning to purchase a vehicle under your business. Lenders will want to see financial records indicating that your business is on a good trajectory as well as a responsible payment history on your business credit score.
If your business is young, it may be difficult to obtain a commercial auto loan. However, if a car is absolutely essential to your company, don’t give up. Even a new business may be able to get a car loan, although the terms may be less favorable than for an established company.
Ideally, you’ll have a couple of years of business records. Build up your business credit by taking out small loans or using a business credit card that reports to business credit agencies (not personal credit agencies).
By making company purchases via corporate credit card, then rigidly paying the balance in full every month, you will show that your business is in good standing and lenders can trust it for a loan.
Hear what Rick Berres of Honey-Doers says about buying a vehicle with business credit:
“As a home renovation CEO, I started as a DIYer with my personal truck. When it came time to expand, my tools were the most important upgrades I invested in first, and I eventually purchased a business truck later down the road. The number one tip I can give small business owners is to invest in some more time with your accountant and discuss what purchasing a vehicle with business credit could look like. There are many ways to take advantage of the tax benefits of purchasing a business vehicle, but you don’t want to do so unprepared and leave money on the table.”
Paperwork and documentation for a vehicle loan
Before buying a vehicle with business credit, do your research on lenders and prepare your documentation for a loan application. Make sure to look at a number of lenders in order to compare rates, loan amounts, and repayment terms.
Where to start: Commercial lenders can be the best place to start, although some smaller banks or credit unions may offer this type of lending.
You may need to prepare a loan proposal that includes how you’ll use the vehicle for business purposes, how much you can put down on the vehicle, and how much you need to borrow. Often, vehicle loans use the vehicle being purchased as the collateral, since the lender can repossess the car in the event you default on payment.
The paperwork you need to gather before submitting the auto loan application may include:
- Business tax returns
- Documentation showing the portion of the business you own
- The business tax ID number
- Recent income and expense reports
- Business bank account statements
Of course, different lenders have differing application processes and criteria, so you can prepare by having the last two years of tax returns and two years of financial reports to provide a firm baseline. Lenders will check your business credit score as well.
Which lender you decide to apply with initially may depend on how likely you feel the lender is to approve. Be aware of your business credit rating and financial records to help determine which lender may give you a favorable response. In addition to legacy banks, fintech lenders may be more favorable to small, new, or minority-owned businesses.
Here’s founder of USSalvageYards Emma Gordon on how she got her business vehicle with business credit:
“I started out by developing a credible business with stable income (good marketing strategies helped me), then I built a good credit rating for my business—I paid bills on time, limited credit applications, and reviewed credit reports to ensure there were no errors.
When I was certain I met the average criteria, I created my proposal and sought out a lender with requirements I could meet and favorable offers. My proposal contained my reasons for needing a car, the amount I was hoping to borrow, and how much I had for a down payment. I also attached copies of my credit report. I presented my proposal to a lender that favored my business, followed the steps to apply, supplied the needed documents, and signed any additional forms. It took almost 15 months after I established my business, but it eventually happened.”
Dealership financing vs. third-party lender
Dealerships are often able to finance vehicle purchases with business credit. However, since the process is more complicated than using personal credit, some dealerships may try to retain the title of the vehicle, which can put you at risk. Some smaller dealerships may not be able to take on the risk of financing a business vehicle due to the depreciating nature of automotives.
The dealership may also only finance part of the loan, meaning you could be forced to take out a second loan to pay a larger down payment. Even if you already expected to take out an additional loan—especially if you’re purchasing a fleet—this could throw a wrench in your plan.
When dealership financing is available, it can be helpful for businesses with unestablished or limited credit history. In cases of established credit, dealership interest rates tend to be higher than commercial lenders. However, those with unestablished credit may find it balances out.
Others prefer to use a commercial third-party lender due to the fact they are focused solely on the business lending space. Ally is a popular option for business vehicle financing.
Ultimately, the choice between dealership financing and a third-party commercial lender depends on the choices before you. Your business credit score, plus your access to reputable dealerships and lenders, makes all the difference.
Pro tip: Thoroughly research third-party lenders before allowing them to make a hard pull of your business credit score. Hard pulls can temporarily lower your score. If you receive too many hard pulls, you may get stuck with a higher interest rate.
What are the benefits of buying a vehicle with business credit?
When you choose to buy a new car using business credit, you add another opportunity to build your business credit. That’s meta.
It may be better to take out an auto loan for your company car purchase rather than paying in cash upfront. A loan enables you to demonstrate your creditworthiness as a small business by paying in full and on time every month. These monthly payments will improve your future credit.
You may also receive tax advantages with your company vehicle. You can deduct two parts of a vehicle:
- The cost of ownership
- The cost of operation
As long as the vehicle is solely used for business purposes, you can deduct the amount of payments on the car loan. Even if you use it partly for personal and partly for business purposes, make deductions for the percentage of the operating expenses for the business. (This is similar to what you’d do if you deduct your home office.)
If aiming to take advantage of tax benefits with your business car, you should be aware of the tax deductions available through the IRS. You can calculate how much is tax deductible either using one of two methods: The standard mileage rate method or the actual expense method.
Actual expenses refer to the actual costs of operation for your company car. If the car is both for personal use and business use, you need to determine what percentage of the time you’re using the vehicle for the business. The IRS says that car expenses can include gas, oil, repairs, tires, car insurance, registration fees, licenses, and depreciation of the vehicle.
If not accounting for depreciation, you may deduct lease payments instead. You can deduct depreciation when you can specify your business miles. Naturally, if the car is exclusively for business, it’s easier to calculate. Even when you share your vehicle between business and personal trips, you can write off car expenses for any business use of the car.
Last word on buying a car with business credit
In many cases, a company vehicle is an essential component of growing your business. Plus, you can continue strengthening your business credit rating—an added bonus.
Be sure to gather sufficient evidence of your company’s ability to repay a car loan through favorable payment history using business credit. Then, use the company car to continue growing your business in the right direction.