If you’re looking to obtain some information about commercial truck financing, you might feel like you’re in over your head. That’s perfectly normal. Whether you’re trying to finance a semi truck, dump truck, tow truck, or one of the many other types of commercial vehicles; lenders are only after one thing. Getting you in the door.
Now I don’t mean that literally, as you might be applying for a commercial truck loan online. What I really mean is that most lenders want you to get to the point that you are committed and you are unable to, or it doesn’t make sense to crank that steering wheel and do a 180.
You’ve picked out your dream truck at the dealer, or you’ve left a deposit with a private party. The last thing you want to do now is back out of the deal. Especially when you need this truck to run your business. This is how the buyers that are looking to take out loans for commercial trucks.
To avoid being trapped by the lender, there are some questions that you need to ask from the beginning. Fortunately, you’re here reading this guide. Let’s get to it.
What Are the First Questions You Should Ask?
Before you even do anything, there are some general questions that you should ask the bank. These are pretty broad in nature, and the wrong answer can be a deal breaker. So it’s extremely important to get this stuff out of the way from the start.
The first thing you need to ask is how much you’ll have to put down to finance a commercial truck. We aren’t talking about a few hundred dollars here. When you’re in the market for a commercial vehicle, we’re talking about large sums of cash. Financing a brand new semi truck nowadays means you’ll be taking out a loan for around $150,000.
That means that the difference between 5% down, and a 15% downpayment is $15,000. If you’re just an owner operator looking for a new rig, the difference between the two is more than one month’s gross revenue. If you have a fleet of 4-5 trucks, the difference is equivalent to your monthly fuel expense.
Will you be able to keep your other rigs fueled if the down payment is too high? This is why it’s so important to get a feel for what type of down payment a commercial vehicle lender will require.
But asking about the down payment isn’t going to be enough.
Getting a feel for how much your truck payment will be is so important when applying for semi truck financing. This can vary even more so than the down payment requirements, which is why it is one of the first questions you should ask.
So, you need to go in and ask “How much will my truck payment be?”. After you do that, be prepared. There are a few other variables that go into calculating your payment. While you won’t get an exact answer up front, a lender should be able to give you a ball park estimate. A couple things that go into determining the payments on a commercial truck loan are:
- Down Payment
- Length of the loan
- Interest Rate
So as you see, we checked off the first one on the list. But what about the other two?
We’re talking about thousands of dollars of each month when comparing a 36-month truck loan to one at 60 months. You’re also going to pay more interest in the later. I’ll give you an example using a 5% interest rate, and 10% down just for demonstration purposes.
Now that’s quite a difference, right? It could be the deciding factor that makes or breaks your business. That’s why you really need to pay attention to the term length that a lender is offering and run the numbers to see what the payment comes out to.
Of course, we have to mention the interest rate when talking about a financing a commercial vehicle. Now, rates are always higher when dealing with business finance, and especially so with commercial vehicles. Don’t expect to get that .49% rate that your wife got on her new Honda Accord.
This part of the equation actually isn’t as much of a factor as you may think, but it is still incredibly important. The only reason that I say that is because a .5%-1% difference in rates isn’t going to cause as much of a variance in the monthly payment (or overall interest paid) as the length of the loan. But of course, the lower the rate is, the better. We all know that!
How do You Qualify for Commercial Truck Financing?
Now that we got through the basic questions that you should ask, we get to the good part. How exactly can you qualify for a commercial vehicle loan in the first place?
Well, there isn’t one concrete answer to that question as there are a few factors. But if you meet at least some of these requirements, you’re probably good to go.
Sales and Revenue
This is probably the most important part. The bottom line is, your business needs to generate a meaningful amount of revenue to be approved. Not only that, but banks prefer when your business is steady year-round, though it’s not a deal breaker if your business is seasonal.
As long as things look healthy, the bank shouldn’t take issue with it. The actual amount of revenue that banks want to see varies, so you should be sure to ask. It also depends on how much financing you are seeking. The more you want to borrow, the higher your revenue should be.
Most lenders will want your business to be at least two years old. But the older a business entity is, the better it will be in the bank’s eyes. That demonstrates that the business is profitable and can pay back the loan. This also leads us into the next point.
You might not know, but your business has a credit score just like you do. It needs to be good for your business to be approved for commercial truck financing. Late payments and defaults affect your business credit score much like your personal score would be affected. So you should be sure that you have no issues here.
A common issue that goes hand in hand with the age of your business is the fact that a new business won’t have any established credit. In a scenario like this, the bank will look at the corporate officers. This simply means that anyone with ownership of the business will be required to personally guarantee the loan.
Personal guarantees are becoming more common as banks seem to continue to become stricter when issuing loans. As with any other loan, the credit history of the corporate officers should be clean to get the best terms on a semi truck, or other commercial vehicle loans.
What Types of Commercial Vehicles Can You Finance?
While most may think of semi trucks when they think of commercial truck financing, there are actually many types of commercial trucks you can finance. Everything from dump trucks and straight trucks to Cement trucks and tow trucks.
But there are some limitations when it comes to the age of the truck, the condition it’s in, and the purchase price.
Generally, banks want to finance a commercial truck that is 7 years old or newer. Anything older, and you may have trouble getting approved. This is simply because trucks that are more than 7 years old tend to become less reliable, break down more, and depreciate in value.
Financing A New Truck
If you are in the market for a brand new truck, you’re in luck. First and foremost, it means that your business is doing well enough to afford such a vehicle. Second, the banks will be much more likely to say yes to your loan application.
Just like when you buy a personal vehicle, the banks would much rather finance new vehicles over used. But that’s not to say that they won’t give you a loan on a used truck. The requirements will just be stricter, and the rates will be higher.
In the unfortunate case of your default on payments, a bank would much rather repossess and sell a 22-year-oldsemi truck in excellent condition over a 15 year old truck that will most likely have mechanical issues.
Financing A Used Truck
Financing a used commercial truck is very much possible, and many new owner operator truckers prefer to go this route. Many times, they purchase trucks that cost less than $50,000. As I mentioned earlier, the rates are higher to compensate for the added risk the bank incurs.
What is a Deal Breaker for the Banks?
So we know what the banks look for in applicants that are seeking commercial truck financing, and we know what they sort of dislike but will look past. But what is a deal breaker that gets loan applications denied?
Low or No Down Payment
As I mentioned earlier, the bank will want some sort of down payment. If you can’t swing that, it might be very difficult to get financed. That’s especially true in the case of a young business.
Poor Personal Credit
When the banks look at the credit scores of company owners, they want to see high credit scores, aged accounts, and many different types of accounts. If you have a low score, limited history, or other dings on your report, the bank won’t be happy. Everything else can be to the banks liking, but if your credit is bad, they’ll quickly say No.
Bankruptcy, Liens, Child Support
Any of these things can be a death sentence on a credit report. If you were to ask a banker what the reason for most commercial truck loans being denied is, they’ll probably tell you it’s one of the three.
Unpaid child support would obviously only be an issue if the business owner is personally guaranteeing the loan, but the other two can affect the business as well. It will be more difficult if any of these apply to you.
What Else Should You Look Out For?
Everything you’ve read will help you understand the commercial truck financing application process. But there’s still one thing to know. And that’s to be sure to stay organized throughout the process, and run the numbers for every loan offer that you receive. That will be key go choosing the best one for your business.