Commercial Truck Financing - What does it Entail?

Published October 8, 2020 by WC Team

Commercial truck financing is similar to obtaining a car loan. You will have to invest a certain amount of down payment to get the rest of the amount and keep your day-to-day operations effective and skillful.  

A strong base to support growth requires finance. Finance can help you bring manpower, to work according to the vision you set. Refrain from forcing your business into a precarious situation. Instead, little financial help may get you the tools, equipment, labor, and business place feasible for you to carry out your plan.  

Choose wisely. While making an informed decision like commercial truck financing, this is a big deal. Read further to know the details about commercial truck financing which includes its importance, advantages, disadvantages and their types. 

Importance of Commercial Truck Financing

A commercial truck is a form of collateral that entrepreneurs can apply to qualify for a loan. If you are the owner of more than one truck, you can obtain the loan easier than those who own a single-vehicle. 

All it requires is a financial statement or a personal guarantee that can meet commercial truck financing obligations.  

A start-up business can easily qualify for commercial truck financing by showing a consolidated statement of incurred revenue and working capital employed for whatever period it exists.

Advantages Of Commercial Truck Financing

Commercial truck financing is a cost-effective opportunity to acquire your need while keeping aside any stress on your finances. What if the plan you choose does not fit your need? 

No matter the opportunities and the benefits, an agreement concerning monetary terms should always be considered with clarity, with appropriate facts at hand. 

Here some of the advantages normally procured from commercial truck financing.

Type of Vehicle

Commercial truck financing can be obtained for old as well as a new motor. In addition to the truck, any part of the truck, for example, tools, vehicle attachment, and machinery can also be repaired using commercial truck financing.

Truck financing helps you spread the cost of acquiring assets for your business. Truck finances usually extend up to 5 years and can be calculated with down payment and installments to be born monthly, quarterly, semiannually, and annually.

Adverse Credit

Commercial truck financing does not overlook the adverse credit requirement. Any form of credit can be obtained, and it usually is not a problem for financers providers to approve loans on behalf of truck finances. 

Refinancing

Finances can be in the form of refinancing assets purchase agreements, leases, or rental agreements depending upon the product you choose. 

Non-Payment

What happens if you are not able to clear the loan? Well, in that case, you suffer from limited liability. The vehicle equipment machinery in question concerned with the relevant payment scheme is removed, and nothing else affects your business.  

Interest and VAT

One of the prominent advantages of truck financing comes with the reclamation of interests and VAT every quarter. However, in that case, it's best to consult your tax advisor or a financial advisor to learn the ifs and buts of such claims. 

Taxes and Off-Balance-Sheet Financing  

Truck financing comes with advantages on your taxes. Commercial trucks for business are eligible for tax deductions based on how much time the truck was used for business operations. Make sure you take this advantage to the fullest. 

Operate the Asset to the extent needed. For instance, make sure your truck operates at least 50% of the time for business purposes. 

In addition to taxes, there are balance sheet advantages. If you are in the process of getting other loans besides commercial truck financing, you can also get off-balance-sheet financing as an added benefit. This is not added to your borrowing ceiling. 

For other loan qualifications, however, leasing agreements have limitations. If you have taken a leasing agreement for a commercial truck and leased the truck from your end, you are technically not acquiring the asset. As such, the borrowing ceiling does not fall under the purview when calculating the balance sheet.  

Disadvantages Of Commercial Truck Financing

Truck financing is loaded with a pool of advantages, besides being a hefty responsibility. On the contrary, there are a few challenges that cannot be overlooked.

Terms of Payment

Payment terms can be tricky depending upon the machinery for which you choose the finance. You may be required to make a deposit or make the payment for the first month upfront. Most organizations do not negotiate on this clause. 

Make sure to check with a financial broker or an advisor before pooling the investment. These terms are usually not dictated by the loan agent. 

Non-Payment of The Loan Amount

Default on your part takes away the asset in question. Commercial truck financing removes the truck from your business for which you were incurring challenges in terms of payments. 

For example, the fulfillment of a certain clause after you start the first installment may turn difficult. Steer clear from the fact that the rest of the business stays unaffected. 

Expensive 

Truck financing is relatively more expensive than using your funds - to support the purchase of a new vehicle or the maintenance of an existing one. Any associated service charges and interest on installments, if taken into account, make the entire sum of money relatively expensive. 

Mileage

Truck financing puts restrictions on mileage. It may seem to you that owning a vehicle and conducting operations is more than enough for a finance provider to look into. However, this is something to think about. 

If you are opting for a rented agreement, in most cases, the agreements have limitations on the number of kilometers the truck can travel. Some also prefer putting specifications on areas and regions where the truck may operate. Any excess results in additional fees or additional interest, for that matter. 

Maintenance

The biggest disadvantage lies in the fact that you are under a liability of maintaining and preserving the asset until you clear the final payment of the item in question.  

The maintenance and preservation of the asset include setting up a suitable insurance policy, taking care of all repairs, and labor costs.

Types of Commercial Truck Financing

Leasing

Truck financing via lease agreement takes place if the business owner requires the assets for a limited time. In addition to that, if the asset in question suffers from a rapid rate of depreciation, it's best to go for a leasing agreement. A lease agreement can be simply put as a borrowing agreement. 

If you are looking for commercial truck financing, a lease agreement will help you borrow the equipment. The lease agreements are usually for 5 years, during which monthly installment, along with a small down payment, maybe the preliminary obligation.

Monthly installments are calculated, taking into account the asset's current worth and it's worth after years of depreciation. Once the agreement reaches maturity, you can either return the equipment or extend the leasing terms, keeping in mind your business's requirement.  

One primary advantage of a lease agreement is the change of models. If you wish to lease a new model with upgraded features, you can do so once the agreement matures. 

Hire Purchase Agreement 

Agreements of this kind are usually applicable in the acquisition of a valuable asset to gain ownership. Hire purchase agreements are most suitable, especially if you are in the phase of starting with new equipment, machinery, or motor. 

Truck financing with hire purchase agreement works by lending the asset from a trusted supplier on your behalf. Before the lender hands over the asset in question, you will have to make an initial deposit. Initial deposit is calculated post, considering the asset's full worth and agreed-on percentage of interest.

On the other hand, these costs are negotiable and often considered on low terms. There are no restrictions, although maintenance responsibilities still take a charging value. 

You will be under an obligation to make fixed monthly payments across a term of 5 to 7 years. Once the payments are resolved, ownership is handed over to the business.

Asset Refinancing 

If you are the owner of unencumbered assets taking the lead in your balance sheet every year, such as vehicles, equipment, and machinery, asset refinancing in terms of commercial truck financing can help you. This option enables you to release 100% of the equity contained in one or more of your business assets. 

Asset refinancing produces a lump sum and can be used for the purchase of new/used assets. Be careful while noting that asset refinancing employs temporary transfer of ownership. However, your accessibility remains 100%. 

This asset-based lending extends for up to 5 years with monthly installments. Once the agreement matures, ownership is returned to business. 

Endnotes

It is important to note that all payments have to be made along with interest per the agreement's duration. In rare cases, a payment equal to the residual value of the asset is payable.

Choose the option that suits your cash flow. Check if an option for balloon payment can reduce your monthly installments.


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