With more than 32 million small businesses in the United States, undoubtedly, some need a car to operate.
But how does auto financing work when purchasing a car for your small business? Can you use your business’s name on the loan?
The answer is yes! And we will walk you through how to use your company to buy a vehicle. So let’s dive in.
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Which Business Can Finance a Car?
In the U.S., not every small business can get a car loan under the business name. For example, limited liability companies (LLCs) and corporations can, but sole proprietorships cannot.
The good news is that if you have a sole proprietorship, you can change it to an LLC or corporation based on your business’s structure and needs. The process is straightforward and could benefit you in other ways in the long run.
Step One: Establish Business Credit
Before buying a car under your business’s name, you must build and maintain business credit to qualify for a loan.
First, get your business an Employer Identification Number (EIN) from the IRS. You can apply online or fill out Form SS-4 on the IRS website.
Then, create a credit profile with a credit bureau, such as:
- Equifax
- Experian
- TransUnion
Next, you can add financial statements and other company information to your profile.
Further, in order to receive a credit score from the credit bureau, you need at least three trade lines with large corporations. For example, you may have a shipping account with FedEx. On the other hand, if you’re a painter, maybe you have an account with Lowe’s.
Each vendor should report your payments to the credit bureau with whom you have a profile.
It will take two years to build enough credit for your business to qualify for an auto loan. Therefore, you want to start building credit as early as possible so you have a long enough credit history when you’re ready to take out a loan.
How to Maintain Good Credit for Your Small Business
Your business must pay its bills on time. A history of on-time payments improves your business’s credit score.
But if you can, pay them early. Paying your bills early will qualify your business for the highest Paydex score. Paydex is a business credit score service by Dun and Bradstreet. Although it’s similar to your personal credit score, it’s specifically for businesses.
Business credit scores range from 0-100. If your score is above 80, you should qualify for a commercial car loan.
A score below 80 may restrict you. It would be best if you considered leasing a car in your business’s name with a lower score instead of buying one.
Also, don’t use too much available credit. Having a high percentage of revolving credit usage doesn’t show financial responsibility. Limit your company to using 20-30% of its available credit.
Finally, review all public records of your business. You need to have a clean record to maintain a good credit score. Bankruptcies, liens, and court penalties will lower your score.
Work with the appropriate parties to clean up any blemishes on your record. For example, settle the debt and get the lien released before buying a car if there is a lien.
If there are any errors in the report, speak with the credit reporting agency to dispute them.
Step Two: Buy a Car
When you’re ready to go car shopping, pull your business credit score from the three main credit bureaus:
- Dun and Bradstreet
- Equifax
- Experian
You will need to pay each bureau a fee to obtain your business credit score. The price ranges from about $35 to $100 per bureau.
With your credit score in hand, it’s time to head to a dealership. You want to go to a dealership with commercial sales departments. These divisions specialize in aiding businesses in buying cars. Working with them will make the purchasing process much more manageable.
When selecting a business vehicle, ensure it meets all your business’s needs. Evaluate what you’ll use the car for to determine which model is best.
For instance, if you spend your days visiting clients, you need a car with excellent gas mileage. But if you own a roofing business, you’ll need a truck or van to hold all your equipment.
After deciding which vehicle you want to buy, hand over all the necessary financial paperwork. The lender will want to see various financial documents before offering a loan, such as your business balance sheet.
The lender will also pull your credit report. Yet, since you got the report yourself, there should be no surprises when they view it.
Choosing a Lender
There are several options you have to finance your business vehicle. First, you can accept the loan from the dealership you visit.
But you can also look for commercial auto loans from banks, credit unions, and other lenders in your neighborhood.
Of course, taking your financial documents to multiple financial institutions doesn’t hurt to see where you’ll get the best offer. This is especially true if your business has a good credit score. You can negotiate a lower interest rate or better terms.
However, if you don’t have a great business credit score, consider providing a guaranty for the loan. A guaranty means if your business fails to make the payments, you’ll be personally responsible for the amount.
But don’t take the decision to sign a guaranty lightly. Your lender can take you to court for your personal assets if you fail to pay the loan.
Once you’ve chosen a lender and agreed to the loan terms, make regular payments from your business’s bank account.
Never use your personal account. This could trigger an IRS audit into your business. It’s illegal to purchase a car under your business’s name solely for personal use. You want to avoid any confusion that paying from your personal account may cause.
Step Three: DMV Registration
Before driving the vehicle, you want to register the car in your company’s name. Each state has its own regulations for registering a vehicle.
In some states, you need to provide a copy of your Articles of Organization to demonstrate you’re running the business properly. Check with your local DMV to understand the requirements.
Remember to pay the registration fees from your business bank account, not personal.
Additionally, only a business manager or owner can register a company vehicle. Therefore, if you have employees, don’t send them to handle this task.
Auto Insurance
Further, you need car insurance. Every state has minimum auto insurance requirements to follow.
If you plan to use the vehicle primarily for business, you can choose a commercial auto insurance policy. But if you only plan to use the car for business part-time, you want to get personal auto insurance.
You’ll also need to consider how many employees will be driving the vehicle to know which policy is right for you.
As with your auto loan, shopping around for an insurance policy is best. This will ensure you get the best deal. If you don’t know which insurance to choose, ask your insurance agent for your business liability insurance for a recommendation.
Benefits of Buying a Car in Your Business’s Name
Purchasing a vehicle in your company’s name comes with unique advantages. These are the top three benefits.
Liability Protection
If an accident occurs and your business’s vehicle causes injury or property damage, the business’s liability protection can prevent you from personally paying legal or medical feeds.
Moreover, your company’s assets are protected from personal debts. For example, if a lender takes legal action against you individually for failing to pay your mortgage, any property your business owns is protected.
Tax Deductions
Business vehicles often qualify for a tax deduction. The amount you can deduct depends on your business status and how much you use the car for business purposes.
You can go for the mileage deduction if you plan to use the vehicle for business and personal use. You’ll need to keep a mileage record since you can only receive a mileage tax deduction when driving the car for business purposes.
However, if you plan to use the vehicle strictly for business purposes, you can go for the Section 179 deduction. This deduction allows you to write off the entire expense of the car.
Be mindful that there are many rules for claiming these business tax deductions. Whether you want to apply the mileage or Section 179 deduction, work with a tax professional to ensure you correctly follow all tax regulations.
Privacy
When you register the vehicle under the business’s name, anyone who tries to search for the vehicle’s owner will be unable to do so. Even though they will see your company’s information, they will not find your personal information.
But if someone wants to keep digging, they could look up your Articles of Organization, since they are public record, to get your information.
Buy Your Dream Business Car Today
If your small business is ready to purchase a vehicle, use this guide to help. You’ll be able to secure the auto business loan you need and register the car in your business’s name without hassle.
Want more business advice? Check out the Business section of our blog. You’ll find new content daily for all your business needs.
