Many businesses require use of a semi-truck or other specialty vehicles, whether for transporting their own goods, commercial shipping, or taking on shipping contracts for other companies. But commercial trucks can be expensive, and business owners often have to borrow to pay for them. This guide can help you understand what you need to know to finance these purchases.
Key Points
• Commercial truck loan options include business loans and equipment loans, each with specific terms and conditions; the SBA will guarantee these loans.
• To qualify for financing, you typically need a minimum credit score, business history, a down payment, and a reliable revenue stream.
• You can expect to pay the principal loan amount plus interest, as well as additional fees such as origination and closing costs.
• Financing refers to purchasing the truck with a loan, while leasing means paying to use the truck without owning it.
• To secure better financing terms, it can help to boost your business credit score, establish a strong business history, prepare thorough documentation, and shop around for lenders.
What Is Commercial Truck Financing?
Commercial truck financing is designed to help borrowers pay for commercial vehicles. One common type, the semi truck, can cost anywhere from $70,000 to $200,000 or even more. So businesses may struggle to purchase them in cash.
Trucking business loans enable the buyer to pay for the truck over the period of the loan, breaking down the hefty cost (plus interest and fees) into more affordable regular payments. To secure the loan, though, you will likely need to put some money down.
If your business relies on cars, vans, or smaller trucks, you may want to look into business auto loans.
Typical Financing Options
Commercial truck loans come in several types. Here’s a look at some of the most common.
Business Loans
A general business loan provides borrowers with a lump sum to fund various business expenses, including purchasing a truck. The borrower agrees to repay the loan over time with interest. For more favorable terms, you may need to offer the lender some collateral. If your business is just starting out, a startup business loan could help you buy the equipment you need to get on your feet.
Business loans are available through traditional banks and credit unions. There are also some specialty lenders who focus on commercial trucks.
Equipment Loans
Equipment financing is a type of small business loan issued for the express purpose of buying business equipment. You can use this type of loan to buy vehicles as well as necessary tools and appliances. As with other business loans, the borrower receives a lump sum, which they agree to repay with interest. The equipment being bought often serves as collateral for the loan.
SBA Loans
An SBA loan is a type of small business financing that is partially guaranteed by the Small Business Administration. These loans are offered through banks as well as private lending companies. In general, an equipment loan that’s backed by the SBA will have a 10-year term.
Financing vs. Leasing
Instead of purchasing your own new or used commercial truck, you may want to consider leasing one. When you lease a truck, you make monthly payments in exchange for its use; your payments don’t go toward ownership of the truck. Depending on specifics, leasing may cost less each month than paying back a loan. Also, leasing may not require a down payment.
That said, vehicle leases may impose mileage limits, sometimes as low as 12,000 to 15,000 miles per year. You’d then be charged a fee for the additional miles. This setup may not work for you if your business requires long-distance hauling or towing.
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Loan Qualification Requirements
Qualification requirements are likely to depend on the type of loan you choose.
Credit Score Requirements
For small business loans, traditional banks often require a credit score of around 680 or more. An alternative lender may accept lower scores of 500 to 600. You may be able to secure an equipment loan with a score of around 630.
Credit score requirements for SBA loans will vary. For 7(a) loans, your personal credit score should generally be in the 630-to-680 range. SBA 504 loans tend to require a score of 680 or more.
Time in Business
Lenders like to see that your business has a track record of success; a solid business footing suggests you’ll be able to pay back your debt. As a result, lenders may want information about your company’s history. For instance, SBA’s 7(a) Working Capital Pilot loans require that your business have at least one year of operating history.
Down Payment Expectations
Most business loans will involve a down payment, since lenders lower their risk by getting some money up front. You can expect to pay at least 10% to 20% of the loan value. But the amount of your down payment can vary. The larger the down payment you make, the more favorable your terms and interest rates are likely to be.
Revenue Thresholds
A predictable revenue stream helps assure lenders that you have the cash flow to make regular loan payments. Lenders may require a certain level of annual or monthly revenue to approve a loan.
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Commercial Truck Loan Costs
With a commercial truck loan, a borrower takes on various costs in addition to paying back the loan principal.
Interest Rates and Terms
Your largest expense is likely to be the loan interest you pay. This is the price your lender charges you to finance a commercial truck. The amount of interest you pay will depend on factors like the type of loan, the amount of the loan, your credit score, and the size of your down payment.
Additional Fees
Your lender may charge several one-time fees when you get your loan. Some examples are origination fees, application fees, underwriting fees, and closing costs. One way to see how fees impact the overall cost of your loan is to look at its APR versus its interest rate. The APR of a loan includes the cost of all fees.
Insurance Requirements
Your lender will likely require proof of insurance to release the funds for your vehicle loan. Ask about their specific requirements before you shop for a policy. You may need extra liability insurance, cargo insurance, and more.
How to Apply for Truck Financing
When you’re ready to apply for truck financing, shop around to various lenders, including banks, credit unions, alternative lenders, and direct lenders who specialize in truck loans.
You may wish to get prequalified by a lender to get a sense of whether you can meet their criteria. You can do it even if you haven’t found the vehicle you want to purchase yet. Or, if you already have a vehicle in mind, prequalification may be helpful when negotiating with the seller.
Documents Needed for Application
When you apply for a loan, have these documents at the ready:
• Business registration
• Business income statements and balance sheets
• Proof of truck insurance
• Commercial driver’s license
• Up to a year’s worth of bank statements
• Three years’ worth of business and personal tax returns
• Your employer identification number
Tips for Securing the Best Financing
Lenders will offer the best terms and interest rates to established businesses with stable revenue and high credit scores. It is possible to secure equipment financing with bad credit, but it may be tricky. If you don’t meet a lender’s credit score criteria, consider taking action to boost your score. These might include paying down other debts and ensuring your existing loan payments are always on time.
The Takeaway
Semi trucks can be expensive, so many businesses take out commercial truck loans. There are a variety of options for financing commercial trucks, including leasing. Reach out to lenders to find out what their loan requirements are and what terms they might offer. In general, improving your credit score will help you to qualify for the best terms and interest rates.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
What credit score do I need for commercial truck financing?
For small business loans, traditional banks will usually require a credit score of around 680 or more. You may be able to secure an equipment loan with a score of around 630. With a lower credit score — possibly as low as 500 or 600 — it may be possible to contract with an alternative lender.
How much is a typical down payment for a commercial truck?
You can expect to pay at least 10% to 20% of the loan value as a down payment on a commercial truck loan.
Can I get truck financing with bad credit?
It is possible to get a commercial truck loan with bad credit, though your options may be limited. Some alternative lenders do specialize in offering loans to borrowers with poor credit.
What’s better: leasing or financing a commercial truck?
The decisions to lease or finance a commercial truck will depend, in large part, on your business needs. For instance, leased trucks may have annual mileage limitations, so if you need to drive farther than the lease allows, it may make more sense to buy.
How long are typical commercial truck loans’ terms?
Loans for commercial trucks typically have a term of one to five years, though some banks and traditional lenders may offer 10-year loans.
Photo credit: iStock/RichLegg
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