Owning your own business means trying to keep your personal and business finances separate, but it can be hard to do so entirely. Depending on your business entity, you should have plenty of distance between your company’s dealings and your own personal finances, but there are still cases in which the two are invariably intertwined. This is particularly true with business auto loans.
It’s hard to get business auto loans without a personal guarantee, as is the case with most small business loans. You’re usually going to have to offer your lender some kind of collateral in exchange for the loan. And, more often than not, you’re going to have to promise that you’ll personally pay back what your business owes, even if your company goes out of business or can’t afford to repay its debts. Kind of scary, right?
Thankfully, you can still get business auto loans without a personal guarantee. These loans might be harder to come by, and you may need to prove that your personal and business credit is stellar, but it is possible.
Here’s what you need to know about getting a business auto loan, how you can get a business auto loan without a personal guarantee, and some alternatives to a business auto loan that might work better for you and your business.
Your company may require you to travel, deliver products, or have a dedicated work vehicle to keep things running smoothly. But buying a van or truck isn’t necessarily cheap—especially if you’re operating on a thin margin and can’t afford to spend thousands of dollars in one shot.
This is where business auto loans can help. A business auto loan lets you purchase the vehicle you need, when you need it. You won’t have to save up to make an all-cash offer, and you won’t have to put the vehicle in your own name through a personal loan. This can go a long way toward keeping personal and business finances separate, which is something we stress all the time for small business owners.
The process of getting a business auto loan is similar to most other small business loans. Before extending you credit, banks need to know that your company is financially solvent, well-managed, and capable of taking on that debt.
So, be prepared to provide your potential lender with financial information about your business, as well as your personal finances.
On the business end, be ready to send along your balance sheets, profit and loss statements, and business tax returns to demonstrate adequate cash flow. Unlike some business loans, however, business auto loans almost always require a down payment toward the overall cost of the vehicle. So, in your application, lenders are also looking at how much money you’re able to offer upfront.
Even though business auto loans are intended for business purposes, lenders may want your personal finances to be in order, as well. Don’t be shocked if they ask for your personal tax returns, bank statements, credit history, and any other supporting documentation about your finances. This helps prove you’ve got a good history with debt, and you’re financially solvent enough to pay for the auto loan if your business can’t.
We touched upon the fact that lenders might request information about your personal finances before offering you a business auto loan. This is true for loans that require personal guarantees, as well as those that don’t.
But the real difference between these two types of loans comes down to your personal responsibility, and whether or not it’s a factor in your loan.
In financial terms, a guarantee is a promise that a debt will be repaid. This is true for guarantors on a rent agreement (who promise to pay even if the renter can’t), just as much as it is for personal guarantees on business loans (who promise to pay, out of their own pockets, if their business can’t).
So, when would you need to personally guarantee a business auto loan? Remember that lending comes down to risk: The greater the risk that a borrower is unable to honor their debt, the more collateral the lender will require.
With that in mind, you may have to guarantee a business auto loan if your loan application errs on the riskier side. That might mean that your company doesn’t make a ton of revenue every year, if your personal credit is challenged, and/or if your business has a poor credit history (or not enough of one).
That said, your lender might ask for a personal guarantee even if your revenue and credit are stellar—again, it’s all about risk mitigation. Anything they determine to be risky, according to their own standards, can be grounds to require you to provide a personal guarantee.
It may be tough to find a business auto lender that doesn’t require a personal guarantee—but it’s not impossible.
The best way to get a business auto loan without a personal guarantee seems fairly obvious: You’ll need to have excellent credit and plenty of money in the bank. “Risk” all comes down to how well you and your business are at honoring their debt agreements, as well as how much revenue your company makes. Banks want to know that you can pay your loan without missing any payments, or without defaulting on the loan entirely.
Set yourself up for a business auto loan without a personal guarantee by paying close attention to these factors. For starters, make sure your business credit is in good shape. Dun & Bradstreet, Equifax, Experian, and TransUnion all offer business credit reports that show you how your business appears to lenders. Make sure you don’t have any incorrect information on your report, and fix any credit issues that might be holding you back from getting a better score.
Also, check your company’s revenue and make sure you’re cash flow positive. Easier said than done, of course, as this is what every small business owner strives toward. But in this context, the more revenue you can show on your application, the more likely you are to get a loan that doesn’t require a guarantee to come alongside it. This isn’t the easiest thing to do, but it goes a long way if you don’t want to offer a personal guarantee.
A business auto loan isn’t the only way that small businesses can purchase vehicles. In fact, there are other loan options out there that may not require the same kind of personal guarantee that a business auto loan does.
Consider the following alternatives:
An equipment loan is a great alternative to a business auto loan.
These loans allow small businesses to purchase the machinery and equipment they need to keep their businesses running—and they don’t require collateral in exchange for funding. That’s because these loans are secured by the machinery you’ve purchased itself—if you can’t pay, the lender will take the machinery back from you to recoup the debt.
This does away with the need for a personal guarantee, since the equipment’s value offsets the risk your lender takes by offering you the money to purchase it.
As another alternative to a business auto loan, consider taking out a term loan. Do be aware, though, that many term loans will require some kind of collateral or personal guarantee to secure.
But where term loans really shine is in their flexibility: You can use these loans for a variety of purposes, as most don’t come with specific limitations on what the borrower does with the money. You’ll likely pay more in interest with a term loan than you would with a business auto loan or equipment loan. But if you work with an online lender, then the approval process will be much quicker, and the credit requirements will be much lower.
Although the prospect of putting your personal assets on the line might be intimidating, you shouldn’t let the stipulation of a personal guarantee entirely steer your search for a business loan. Ultimately, the best loan for your business is the one that offers your business the funds you need, and which you’re confident you can repay according to your lender’s terms.
Luckily, there are many options for small business owners looking for funding, so carefully evaluate all of your options. Begin by understanding your company’s credit history and finances—the better off your company is financially, the broader your options are. Keep an eye on your personal credit and money management, as well, as this could help you get approval for any kind of loan. And, if you can’t find a business auto loan that works for your business finances or needs, widen your search to an equipment loan, a term loan, or another type of business loan entirely.
Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera.
Meredith launched the Fundera Ledger in 2014. She has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending and financial management.