When businesses grow, some need to buy more trucks to accommodate demand. When trucks break down, they must get repaired, or the company needs to buy a replacement, all of which is expensive. This combination has some small business owners using commercial truck loans to expand their fleets, which are financing products designed specifically for the purchase of these large, costly assets.
How Does Commercial Truck Financing Work?
Business owners use financing to buy or repair a truck. The truck then becomes collateral for the loan. If you don’t make payments, the lender can seize your truck. Longer loan terms decrease monthly payments but leave you in debt longer, giving the lender more time to collect interest from you. Shorter loan terms accelerate equity growth but increase monthly payments. However, your borrowing costs could be substantially lower, depending on the loan term and interest rate.
Types of Truck Loans
Small business owners can select from two types of truck loans. We have the details on each type of truck loan below.
Equipment Leases
Leasing a truck is like paying rent. Renting a property helps you move out sooner, but the monthly payments never go away unless you own the property. In addition, each monthly lease payment does not build equity in the asset—it’s paid to the lender in exchange for the use of the vehicle. Still, leasing a truck is a great way to save money in the short term.
Leasing a truck may cost less money than financing it. However, leases do not give you ownership of the vehicle, and the contract may come with restrictions, like mileage caps
Equipment leases are especially beneficial for business owners who operate seasonal companies. For example, a company selling shipping Christmas ornaments may lease trucks for a few months to accommodate higher demand. They may not want to own these commercial vehicles and make monthly loan payments during slow seasons, so a lease is more helpful for their specific circumstances.
Equipment Loans
Equipment loans give you full ownership of the truck. You’ll pay more in the short term, but you’ll save money in the long term compared to getting a lease.
Equipment loans also come with lower insurance rates than equipment leases. You’ll pay less insurance now and eliminate monthly loan payments in the future. Equipment loans are great for businesses that will use the new truck for years to come, especially considering how your savings add up significantly if you use the truck for many years.
Factors To Consider Before Financing Your Commercial Truck
Getting a commercial truck loan is a significant investment. You’ll have the loan for several years, and you may have the vehicle for over a decade. We’ve outlined some factors to consider before financing your commercial truck.
New vs. Used Trucks
It’s no secret why people opt for used trucks and trailers: they’re cheaper. However, trucks with high mileage have more wear and tear, making them less desirable. While you can initially save money on a used truck, that truck may need expensive repairs in the future. In addition, some used trucks are more trouble than they’re worth. As a result, you might save on a used truck in the short term, but you have a greater risk overall.
New trucks cost more but come with more certainties. For example, you don’t have to worry about how a previous driver used the truck. Entrepreneurs can rely on a new truck for many years if kept in good condition.
Small business owners with more funds may opt for a new truck, while startups often resort to used trucks. If you buy several trucks in one moment, you will get more vehicles in the fleet for your trucking business if you opt for used trucks.
Costs Of Commercial Truck Loans
Commercial trucking loans require monthly payments for several years, so you should assess your budget and determine how much you can afford to spend. By setting a budget ahead of time, you can avoid borrowing too much or too little money, both of which come with their unique set of drawbacks. Borrowers can also set longer terms to decrease their monthly payments, but this will depend on the lender you’re dealing with and your business’s financial information.
Fees and Interest Rates
Fees and interest rates add up, and they vary by the lender. If you’re looking to secure the most competitive interest rate, you’ll have to submit several loan applications and sift through your options.
Lenders offer the lowest rates to less risky buyers with stellar credit histories—a strong balance sheet, a higher down payment, and a good credit score can help you secure a lower rate.
Some small business owners strengthen their credit scores and other areas before approaching lenders. You can also ask a lender for a refinance in the future after improving your credit.
Repayment Terms
Repayment terms influence how much you’ll pay each month. Opting for longer terms can decrease your monthly payments, but extended repayment terms often lead to higher interest payments in the long term. However, many small business owners care about reducing their expenses in the short term, so this might be a necessary expense.
Lenders will also be more inclined to work with business owners who want lengthier loans. After all, lower monthly payments reduce the risk of default.
Truck Insurance
Truck insurance costs more money for a lease than a purchase. Insurance costs will also increase if you buy a used truck or have low credit. Consider how these costs will affect your monthly budget before accepting a loan. If you’re worried about your ability to afford the insurance on top of your repayment, you can consider extending the loan’s term to provide room in the budget for truck insurance.
How Do You Finance A Commercial Truck?
Financing a commercial truck requires planning and assessing your choices. Next, we’ll discuss the steps to take for your commercial truck loan.
1. Determine Your Down Payment
Small business owners should approach every loan with a maximum down payment. Having this budget prevents you from overspending and becoming financially vulnerable to surprise expenses.
2. Find The Truck You Want
After determining your down payment, the next step is finding a truck you want. The down payment maximum sets a parameter for your selection; You cannot select a truck that would exceed your maximum down payment.
3. Understand Loan Requirements
Each lender has different requirements, but they also share similarities, like their need for reassurance that you’ll repay the loan on time. So, many have a minimum credit score requirement for personal credit scores, which tells the story of how you’ve handled debt obligations in the past – the higher your credit score, the less risky you are to lenders. Of course, it’s equally important that you’ve been in business for at least a year and earn sufficient revenue to afford the monthly loan payments.
4. Compare Loans
Next, you’ll start researching lenders, comparing their loan programs, and submitting applications for the loan amount you need. Browsing through your choices, though, instead of jumping at the first offer, can help you get attractive rates and terms.
5. Gather Paperwork and Requirements
Lenders will request financial documents, statements, and other information to help them assess the risk of giving you a loan. To illustrate, some lenders require two to three years of tax returns and financial statements when evaluating your loan application. Be sure to inquire with each lender before applying to determine what you’ll need. Also, keep all of your paperwork together to streamline the approval process for each loan application and avoid any delays.
Where Can I Get Commercial Truck Financing
Semi-truck financing helps businesses get trucks for their fleets without having to shell out an exorbitant up-front cost. Various lenders can provide the money, but it’s best to compare your options. Borrowers should look at online reviews and review each lender’s terms.
You can fund your truck lease or purchase through these financial institutions.
Truck Financing Companies
Truck financing companies offer specialized support for borrowers seeking trucks. You may find lower interest rates and down payment requirements than traditional lenders. Still, you’ll need a strong credit rating to qualify for a loan with competitive terms, assuming you meet the lender’s other eligibility criteria.
Banks
Traditional banks have loans specifically for commercial trucks and other vehicles, but they also have traditional loan products you can leverage for your purchase. However, banks and credit unions tend to have strict eligibility requirements that prevent businesses with less than favorable financial information from reaching approval. They also won’t finance more niche industries, which can further the difficulty of reaching approval.
Online Lenders
Online lenders simplify financing, making it easy for clients in the trucking industry to access a commercial vehicle loan to make a truck purchase. Instead of visiting a local branch, you can fill out a form and receive approval for your loan request. The straightforward application process, quicker access to funds, and less stringent requirements make them a popular choice among small business owners.
