What Is Commercial Truck Financing?
Commercial trucks are a vital component of many businesses, but they aren’t cheap. Even a used Freightliner semi-truck can cost $80,000 or more, while used box trucks might run $25,000 to $40,000 or more. As some businesses have to plow a
significant portion of their working capital into growing and expanding the business, there’s often not a lot left over to purchase trucks outright, particularly for small businesses.
This is where commercial truck financing comes into play. Companies can turn to the commercial truck financing market to raise the needed funds to get one or more trucks. Lenders are willing to make these loans, even to young or growing
businesses, because financed trucks can be used as collateral. While investing in an unknown business can be risky, if a business defaults on a commercial truck loan, the lender can usually repossess the financed truck to make good on the
Will Bad Credit Prevent Me From Getting Commercial Truck Financing?
The commercial truck financing industry is accustomed to working with clients that have bad credit, so there are options available to those with poor credit. While bad credit might limit your options or come with higher rates, you still
have options. You also have the option to improve your credit.
Don’t fret if you don’t already have top-tier credit. Credit scores are a snapshot of your financial situation on a particular date. Over time, credit scores change. With some work and dedication, you can improve your credit score,
thereby improving your options for commercial truck financing.
Credit scores are determined by an analysis of five different variables: your payment history, amount owed, credit mix, length of credit history and new credit. For the most part, time is your friend when it comes to improving your credit
score. With few exceptions, it’s hard to immediately improve your score by 50 points of more. However, demonstrating a history of reliable credit practices will get your score moving in the right direction. For some financing companies, the
trend of your credit score can go a long way towards overlooking a low absolute score that was the result of long-ago credit missteps.
For the most part, improving your credit score is pretty straightforward. Payment history is the single largest credit score component, so the longer you can make on-time payments, the more your score will improve. Similarly, the length
of your credit history obviously improves over time, which will improve your credit score, as long as you aren’t continually opening new accounts or closing old accounts that shorten your average account life.
The one area where you can make a large and nearly immediate improvement to your score is with your amount owed. If a large outstanding balance is weighing on your credit score, paying that off will immediately perk up your score. If
you’re looking to apply for a new commercial truck loan, wiping out any of your existing loans first can go a long way towards improving your loan options.
Will a Short Operating History or Low Profits Prevent Me From Getting a Commercial Truck Loan or Lease?
Your credit score isn’t the only factor that can improve your truck financing terms. Getting your company on solid financial footing can play an even bigger role. Of course, this isn’t a quick fix either. But if you can put the time and
effort in to make your company profitable — or at least moving in that direction — you’ll have a much easier time finding acceptable lending terms.
For some businesses, waiting for profit trends to improve could mean at least temporarily shelving the plans to expand by financing a commercial truck. This is a business decision that must be made by company owners and management. Some
companies might choose instead to forge on — perhaps with a second-tier lender — in order to finance a truck and keep revenues growing. Once the company becomes more established, additional trucks can perhaps be financed with first-tier
lenders, as company revenues will have grown and a more solid credit history will have been built.
Some businesses, such as startups, might not have the option to wait for improving revenues. For many of these companies, the simple truth is that without a truck, there will be no revenues to speak of. If your company is in the position
that it needs a truck to get moving, know that even startup companies have financing options.
What Are the Pros and Cons of Commercial Truck Financing?
Commercial truck financing can solve a lot of problems for businesses that have an immediate need to deliver their products. However, no financial transaction is completely one-sided. To get the benefits of a commercial truck loan or
lease, your business will have to be willing to accept the drawbacks as well. For this option to make sense for your company, the pros will have to outweigh the cons.
Pros of Commercial Truck Financing
There are many positives to financing trucks, namely it gets your business up and running. Here are some major pros to financing a truck:
Commercial truck financing can give you a competitive edge. For startup companies, having access to a commercial truck loan can literally mean life and death for the business. Without a way to get products to customers, startup
companies can’t generate revenue. However, even for more established companies, access to truck financing can be critical as well. In a competitive world, companies can’t simply sit still and expect to succeed. Even successful companies
eventually have a need to expand their existing equipment, or at the very least upgrade and repair it, so access to financing is essential to keep up with or surpass competitors.
Borrowing money from outside lenders means you don’t have to use your own. In a perfect world, companies would have enough excess cash to buy all of the equipment they needed without impairing their cash flow. The reality for most
businesses, however, is that free cash flow is critical to fund ongoing day-to-day expenses. If your business needs a fleet or three or four trucks, for example, that might require a cash outlay of $300,000 or more for a straight
purchase. This is simply unrealistic for many small- or medium-sized businesses, and it’s likely impossible for a startup. Having access to the commercial truck financing market can be the only feasible option for these types of
businesses to grow.
You can structure a finance arrangement to best meet the needs of your business. For some companies, leasing a truck is a better option than a purchase finance option. For others, the opposite could be true. Assuming you can
qualify for financing, this ability to tailor your contract can be a huge benefit for your business. For example, if your business requires that your fleet makes numerous high-mileage trips, you might prefer leasing, as the leasing
company has to take the truck back at the end of your term. If, on the other hand, you prefer to do your own maintenance and squeeze as much value as possible out of your fleet, you might want to hold your trucks long-term via a purchase
Whatever your needs, the diverse commercial truck financing options that are available can help your business thrive.
Cons of Commercial Truck Financing
As with anything, there can be downsides as well. It’s up to you to decide if the pros outweigh the cons. Here are some cons of commercial truck financing:
Borrowing money raises your total cost of doing business. Any time your business borrows money, you’ll have to pay interest on the amount you owe. Even if you have great credit and your business has a spotless operating history,
you’ll likely be looking at an interest rate of 5.99% or more on the amount you borrow. This might not seem like a lot, but here’s how the numbers play out. Let’s say you borrow $50,000 to finance one or more trucks over five years at an
interest rate of 5.99%. This translates to a monthly payment of $966. After 60 months of payments, you’ll have paid $57,960. If you could have managed to buy the truck outright, you could have saved $7,960 in interest. That said, the
money you pay in interest could be worth the ability to have consistent cash flow over time while paying down your debts slowly.
You’ll still have to put up some money. One of the primary benefits of financing a commercial truck is that you don’t have to pay for the whole truck upfront. However, this doesn’t mean that you don’t need any cash to finance a
commercial vehicle. While there are some no money down financing options, they aren’t that common. Lenders will almost always require some type of down payment up front, typically at least 10 to 20 percent. For borrowers with poor credit,
this requirement can jump as high as 50 percent. If your company doesn’t have any working capital at all, even the commercial truck financing market isn’t likely to be of much service, particularly the largest lenders.
You might have to pin the future of your entire business on your ability to make payments. When you take out a commercial truck loan, the truck itself will be the collateral that secures the loan. If you’re unable to keep up with
your payments, your lender could have the right to repossess your truck to satisfy your obligations. Although you might be able to work out some type of arrangement with certain lenders if your cash flow suddenly tightens, other lenders
could be less forgiving. If you lose your truck because you can’t make your payments, your entire business could go under, a consequence you’ll want to avoid at all costs.
The reality is, despite some cons, commercial truck financing might be your only route to starting your business or expanding your fleet. If you’re truly committed to your trucking business, commercial truck financing is a necessity.
How Does Commercial Truck Financing Work?
In its most basic form, commercial truck financing is a lot like getting a personal loan. Lenders will evaluate your financial condition and determine whether or not you qualify for a loan, and at what interest rate they are willing to
accept for the risk of financing you.
However, the actual process of commercial truck financing is a bit different than it is for personal loans. With a commercial loan, the financial history of your business can often be more important than your personal credit report,
depending on the lender and type of financing you seek.
Lenders will traditionally ask for at least three years of your company’s financial statements so they can evaluate your profitability. The more successful your company is, the more likely you are to be approved for a commercial loan with
modest interest rates.
Even companies that aren’t profitable can be approved for commercial loans, however. If your company generates significant cash flow or is moving towards profitability, a lender might still be willing to work with you.
Just as with personal loans, there is no shortage of banks, credit unions and other finance companies that are looking for additional customers. Each of these lenders has their own requirements for qualification, and some could be a
better match for your needs than others.
For example, credit unions aren’t likely to offer semi-truck title loans or other large commercial vehicle loans, but they could be an avenue of financing for smaller vehicles such as box delivery trucks. Traditional banks tend to lend
primarily to well-established businesses that have a demonstrated history of generating profits. The application process for these types of loans can be lengthy. Other options, such as Seek Business Capital, serve customers like startups
that might not have the time or ability to qualify for bank loans. These types of companies have a more streamlined application process and can be a good option for non-traditional or non-qualifying borrowers.
What Documents Do I Need to Apply for Commercial Truck Financing?
When you apply for commercial truck financing, your lender will need to understand the complete picture of your business and your finances. As the business owner, you’re intimately familiar with all the workings of your business, but to a
lender, you are a blank slate. You’ll need to provide extensive documentation to show that your business is up and running, with the lifeblood of revenue already flowing through it.
The type of lender you ultimately work with will likely be a function of the size, operating history and profitability of your business. However, no matter the lender you’re looking to work with, you’ll need to provide certain basic
documents. Remember, you’re trying to show your potential lender that you have a legitimate, fully functioning business, so the more you can offer to paint that picture, the better. You should expect to provide the following documents to
any potential sources of capital financing:
- Financial statements
- Tax records
- Business license
- Applicable permits
- Commercial driver’s license
- Legal name and Social Security number to pull your credit report
- Personal financial information, especially anything pertaining to your credit history
- Proof of insurance or the ability to acquire it at the time of financing
- Information on the type of truck(s) to be financed, including their intended use
Documentation required are at the discretion of the lender. Some lenders might not require all of this documentation, while others might request much more in-depth information. Providing what a lender needs is the first step to qualifying
for commercial truck financing.
What Are the Best Commercial Truck Loans?
There isn’t one single “best” commercial truck loan available to all borrowers. The best loan for you is the one that you can get with the most favorable terms. If you’re a long-standing, well-established company, you might be able to get
the best combination of rates and servicing from a large, traditional bank. Startup companies, or those with limited operating histories or other negative factors, might find that alternative options like Seek Business Capital offer the
best available options. Bad credit borrowers might be best served by a lender that specializes in lending to similar credit profiles. In fact, for newer companies, online and specialized lenders might be the only options.
Should You Choose a Commercial Truck Lease or Loan?
Commercial truck leasing and commercial truck loans are very similar in some ways but have important differences. No matter which you choose, you end up making payments in exchange for getting a truck you can use in your business. Which
one is better for your company depends on your long-term business plan and your cash flow, among other considerations.
Commercial Truck Lease: A commercial truck lease is a limited-term financing option. You’ll essentially be renting your truck from the lender, and when your term is up, you’ll return the vehicle. On the plus side, you’ll be
constantly using new or newer trucks, as you’ll have to pick a new option every time your lease matures. Of course, this can also be the down side of the whole arrangement — you’ll have to lease a new truck when your original term expires,
otherwise you won’t have a truck for your business any more.
Commercial Truck Loan: A commercial truck loan makes you a commercial truck owner. When you’re done paying off your loan, the lender will hand over the title and the truck is officially yours. The main benefit of a loan is that you
stop making payments after your term is over. The main drawback is that you might now own a truck that you no longer want. Let’s say you’ve got a 5-year lease, and your drivers average 50,000 miles per year. You now own a 5-year-old truck
that has 250,000 miles on it, and it’s your main business truck. You might be done making finance payments, but you can expect your maintenance costs to continue climbing.
There’s no one correct answer when it comes to leasing versus purchasing a truck for your business. You’ll have to run a cash flow analysis that includes depreciation and factors in your future business needs to help you determine which
might be the appropriate option for your company. Opting for a commercial truck lease or loan might also just come down to personal preference.
You can also ask an accountant for help in making your decision between leasing and financing. In addition to helping you analyze your financial situation, an accountant might better understand the tax ramifications of your choice.
Leasing and financing might offer different tax benefits, possibly to the point that the scales are clearly tilted towards either leasing or financing for your company.
Does My Personal Credit Score Affect Truck Financing?
A good personal credit score isn’t an absolute necessity to qualify for commercial truck financing. However, it could help lower the rate you have to pay or the size of your down payment. Anything you can do to demonstrate to your lender
that you have the ability to repay a loan is a plus, so having a good record of paying off your own personal liabilities can do nothing but help.
Of course, if your business is an LLC or a corporation, you aren’t personally liable for the finances of the company. But a good credit score can nevertheless demonstrate that you take your liabilities seriously and that you aren’t likely
to simply walk away from what you owe.
If you’re a startup, you might not have much to show your prospective lender in terms of operating history or business credit, so having a spotless personal credit report might be particularly important.
How Does My Credit Affects Commercial Truck Financing?
Credit, both personal and business, is the cornerstone of any type of financing, and commercial truck financing is no different. If you can’t demonstrate the ability to pay back your loan, you’re not likely to find a warm reception from
Every lender wants to get paid back what they lend out, which is why established businesses with massive cash flow have greater access to financing of all types. The good news is that the lending community understands that not every
business is going to be Apple or Walmart, with billions of dollars in revenue every year.
In fact, the vast majority of businesses are small businesses, and small businesses have every bit as much of a need for financing as long-established businesses — perhaps even more so. As these businesses need servicing, numerous lenders
exist that actually focus on companies that might not have top-tier credit.
Of course, this doesn’t mean it is easy. Businesses with bad credit or short operating histories have to make other concessions in exchange for the added risk that they present to lenders. This can come in the form of added collateral, a
larger down payment, less favorable lending terms or all of the above.
Does Being an Owner-Operator Affect My Financing Options?
As a sole proprietor owner-operator, a lending company might see you as a higher risk than a trucking corporation. If you’re essentially a one-person show, by definition you are taking on a higher risk than a corporation or limited
liability company. In addition to being responsible for all of the company’s finances, you are the one actually operating the truck. Overall, there can be greater financial pressure. If, on the other hand, you’re running a trucking company
that hires out its own drivers, you can keep your fleet constantly running and generating revenue, with no vacation time or other day-to-day business obligations interfering with your cash flow.
Do I Need a Down Payment to Finance a Truck?
The short answer is no, but you should.
The larger the loan, the more risk the lender takes. If you can put up a larger down payment, you’re reducing the risk to the lender and will therefore be more likely to be approved for a commercial truck loan. You could get more
favorable rates and terms if you have a down payment, and it’ll ultimately save you money since you won’t have to pay interest on the entirety of the truck’s value.
Usually, you’ll have to put at least something down, even if you’re an established business. If you haven’t been in business for very long, or if your business doesn’t generate powerful free cash flow and earnings, you can expect the
required down payment percentage to rise. Some lenders ask for 30 percent to 50 percent as a down payment from certain borrowers.
There are some no money down financing options, but they’re generally reserved for those with good to excellent credit. If you can afford to put down a down payment, it’s in your best interest to do so.
Should I Buy a Truck From a Truck Vendor or Private Seller?
If you’re buying a truck from a reputable truck dealer, you’re more likely to get your loan approved because you’re reducing risk for the lender.
When working with a licensed dealer, your truck will have a paper trail attached to it, including information on the truck’s history of owners and its maintenance schedule. With a private seller, this information might not be available.
You might be able to buy the truck for a cheaper price from a private seller, but you could lose out on the back end if your loan comes in with a higher interest rate.
Do I Need Truck Insurance to Finance a Truck?
Since your truck acts as collateral for your loan, your lender will no doubt require insurance on your truck. Otherwise, the loss of your truck could prove catastrophic to both you and your lender. Without a truck, you might not be able
to do business any more, thus eliminating your ability to repay your loan. Since damage to commercial trucks is fairly common, insurance is a must.
Truck insurance can be expensive. In fact, insurance can be one of the biggest fixed costs that you’ll face, so you’ll have to factor that in to the overall cost of financing your truck. On top of liability insurance — of which you might
need coverage of at least $750,000, or $5,000,000 if you’re a hazmat hauler — here’s just a small sampling of the insurance types you might need:
- Bobtail insurance, which protects you when driving a truck without a trailer
- Physical damage insurance
- Non-trucking liability
- General liability
- Workers’ compensation
- Umbrella insurance
- Trailer interchange insurance
- Cargo insurance
Depending on the type of truck you are financing and the particulars of your business, your lender might specify minimum insurance amounts as well.
What Costs Will I Pay After I Finance a Truck?
When determining your budget for a commercial vehicle loan, don’t overlook the ancillary costs that come with owning and operating a truck. On top of your lease or loan payments, you’ll have to factor in these additional expenses, among
- Insurance premiums
- Driver wages
- Driver benefits
According to the American Transportation Research Institute, these marginal costs added up to $1.691 per mile in 2017, the most recent year for which summary data is available. This translates to additional operating costs of $66.65 per
hour, on average.
If you use your entire capital budget to acquire or pay for a truck, you might not have much flexibility in your business when these additional costs trickle down to your bottom line. It’s important to consider your entire financial
picture when deciding how much truck you are willing to finance.
Another element to consider is your future trucking needs. If you intend to stay in business for the long-haul — and that should be the goal of any business — the time when you need newer or additional trucks might not be that far in the
future. Even if you intend to stay with a one-truck fleet, the average truck-tractor is replaced after just 7.6 years, or 695,000 miles, also according to the ATRI.
The good news is that if you’ve found a reputable lender, you shouldn’t be making these calculations alone. As a lender has a vested interest in the success of your business, so some will even help you break down your anticipated future
costs and how they could affect your ability to pay off your loan. At the end of the day, neither a borrower nor a lender should be interested in a loan that can’t be repaid.
Which Is Better: An Operating Lease or Capital Lease?
Both operating and capital leases have their pros and cons. The needs of your company will dictate which is the better option for your company.
Operating leases are best for companies with limited cash flow, as monthly payments are lower. Businesses that need or prefer newer vehicles in their fleet are also good candidates for operating leases, as you’ll constantly be getting new
vehicles every time your original lease matures.
Capital leases can end up being cheaper in the long run for companies that maintain their vehicles well. As you’ll own your commercial truck outright at the end of your lease term, you’ll want to keep your vehicle in tip-top shape so that
it will remain in service long after your lease matures.
With a capital lease, you won’t be signing up for an endless stream of monthly payments as you would with an operating lease. Although your fleet of vehicles won’t always be brand new, you will have an asset on your balance sheet. Of
course, you’ll also have all of the responsibilities of ownership, such as maintenance.
How Does the Type of Truck Affect Financing?
Certain types of trucks are less risky for lenders to finance than others. Vehicles used for long-haul trucking, for example, are riskier than trucks which are used for local deliveries. The reason is simple math. Trucks which remain in a
relatively limited area don’t rack up the miles as much as those which are going back and forth across the country, and a truck with less mileage is more valuable.
Additionally, high-mileage trucks that are in constant motion are more likely to need repairs. Repairs not only drain a business of cash flow but also reduce revenue, as a disabled truck can no longer generate cash flow for a company.
How Does the Age of the Truck Affect Financing?
The newer the truck you are looking to finance, the more likely you’ll be able to get a loan. Older trucks tend to break down more often, posing the risk of lost revenue for a business. Lost revenue means the higher risk of missed
payments, something lenders try to avoid when issuing loans. This makes used truck financing harder to come by, and typically more expensive.
It’s true that not all older trucks are in poor condition or have high mileage. However, even older trucks that are well-maintained can be problematic for lenders. If for some reason you can no longer make payments on your truck, your
finance company will repossess it. While this might seemingly make your lender “whole,” in reality, your lender is stuck with an old truck that it has to sell to recoup its loan loss. By their very nature, older trucks are harder to sell,
even if they are in good condition, which makes it more likely that the lender will lose money on the transaction.
For this reason, it’s nearly impossible to get a lease on an older truck, as opposed to straight financing. Unlike the above scenario, which is perhaps unlikely, with a lease arrangement, a lender must take the truck back at the end of
the contract. At that point, the lender is in the same predicament — it must sell an old truck to make money on the transaction, which can be hard to do.
How Does the Condition of the Truck Affect Financing?
The condition of the truck being financed is an extremely important factor in determining the risk involved with any particular loan. Since the truck itself serves as the collateral for the loan, a truck with little or no value won’t be
worth the risk of extending the loan.
Imagine this scenario: A borrower gets a loan for a truck with over 1 million miles. After a few months, the borrower can no longer make payments. The lender repossesses the truck, which now has 1,100,000 miles and is on the verge of
breaking down. The lender ends up losing money, as it wouldn’t be able to sell the broken-down truck for enough money to cover the outstanding loan balance. It’s just not worth it for the lender, therefore they typically will not finance
trucks in such conditions.
How Does Having Business Cash Reserves Affect Truck Financing?
Having a long-term, profitable business and making a large down payment might be enough to qualify you for a loan, but lenders still need to know that you can afford to make the payments on that loan. Your odds of qualifying for a loan
with a low interest rate can improve dramatically if you show a high level of cash reserves.
Cash reserves are important because every company is subject to the business cycle. There will inevitably be leaner times when your business isn’t pulling in the cash flow that it might earn when times are good. No matter what your
current business situation, your lender will expect you to continue making your regular loan payments. With significant cash reserves, you’ll be more likely to make those payments regardless of the current business environment, thereby
making you less of a risk for the lender.
Cash reserves are also necessary to cover the ancillary expenses involved with financing a commercial truck. Without extra cash on hand — or a high revenue stream or cash flow — your business might be stretched to cover daily operating
expenses on top of the strain of a new commercial vehicle loan. Lenders take all of this into account, so having additional cash reserves can make it much more likely that you’ll get approved for your loan.
Can I Get Commercial Truck Financing From an Online Lender?
Online lenders have a lot to offer when it comes to commercial truck financing — primarily convenience. A quick search online can turn up a number of nontraditional lenders that operate primarily or solely online, which can make the
entire financing process more streamlined.
Another benefit of online lenders is that they tend to have less restrictive credit requirements for borrowers. Whereas an established bank might require years of profitability, a sparkling personal credit score and a significant down
payment to finance certain businesses, online lenders might offer more flexibility and leniency.
That said, online lenders might have higher interest rates and no in-person customer service. Decide what matters to you most and weigh your options.
The Bottom Line
The world of commercial truck financing has lots of moving parts. However, at its core, it’s not too different from financing a personal car. Companies with the best cash flow, no credit delinquencies and a long operating history are the
most likely candidates for loans with good terms. Startup companies, or those looking to finance a single truck, might run into more difficulties obtaining financing. However, specialized lenders do exist that can tailor financing to the
needs of even new businesses. Whatever your financial position, try to present the most positive financial and credit history you can before you begin the application process. Research lenders that might be a better fit for your business
and you’ll have the best luck at securing your commercial truck financing.
As with many relationships in life, the match you make with your commercial truck lender has to be right for everything to go smoothly. What might seem like the most popular or the most generous lender might not be the right one for you
and your company. In addition to getting approved for the financing you want, it’s also important to look for appropriate servicing and support when choosing a lender.
A lender that understands your specific needs might be able to better come up with solutions to your financing needs and might even anticipate potential problems in your industry that you might not see coming. These types of lenders can
prove invaluable to growing companies, even if the interest rates they charge could be slightly higher those offered by other institutions.
The bottom line is that you should consider the entirety of a working relationship with a finance company before making a decision that could impact the success or failure of your company. It’s not all about interest rates, terms or the
name on the lending company’s stationery. The lender that can best help you company succeed overall is the right one for your business.