How to Buy or Lease a Business Vehicle (+ Types of Loans)

Rachel Curry

Rachel Curry

Published on: 29 November, 2022

Updated: 30 December, 2022

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All kinds of businesses, big and small, travel for work—not just the business-suit types who frequent airport lounges. Movers, landscapers, solopreneurs, wholesalers, and many more all use business vehicles to get around day to day. 🛻

If you own a small-to-medium business (SMB) or are launching a startup, you may be eyeing a vehicle for your operations. Whether it’s a one-off car or fleet, know how to buy or lease the right way.

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Checklist: How to buy a car for your business

There are a few key steps to take when buying a vehicle for your business. Go through these one by one for a seamless process and a result that serves your business well:

✅ Choose between buying and leasing.

When reviewing the pros and cons of car leasing vs. buying, consider whether you want a single vehicle or a fleet—and how you plan to use it. This will help you determine which option is right for your business. 

Buying a business vehicle

Pros:

🚦When buying a business vehicle, you can choose between a new vehicle or used car.

🚦Buying often gets you lower monthly payments than leasing, especially if you minimize the car loan with a bigger down payment.

Cons:

🚨You will likely pay a bigger upfront cost.

🚨The longer you own the car, the more depreciation it will experience.

🚨The warranty period doesn’t last for the life of the vehicle.

Leasing a business vehicle

Pros:

🚦At the end of the lease period, you have the option to buy out your lease at the vehicle’s residual value (whatever’s left over of the original price that you haven’t paid as part of your lease payments). You can get a closed-end lease option in your initial contract to specify the terms of the deal if you decide to purchase.

🚦Leasing gives you the chance to get a nicer vehicle without having to pay the down payment upfront. You can also more easily and sooner move on to a new car if that’s important to you.

Cons:

🚨You can’t sell and profit from your leased vehicle at the end of the term unless you buy out the vehicle.

🚨Compared to buying, you may have higher monthly payments with a leased car.

Both options offer warranty benefits and let you make up for some of the cost with a trade-in vehicle. They also allow you to write off some of the cost, though there are conditions (more on that below!). 

On the downside, both options also require you to pay sales tax (as if Uncle Sam would let that slide 🎩).

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✅ Choose a vehicle, negotiate, and finalize the deal.

You can purchase or lease a vehicle in your business name as long as you have a limited liability company (LLC) or corporation. However, you’ll need to establish some business credit first, which can take time (especially if you’re self-employed. If you’re a startup with a thin business credit file, you can personally guarantee the company car.

If you buy a business car in your name, you can eventually transfer it with a notarized title transfer form, which you can pick up from your local Department of Motor Vehicles (DMV).

Smart Tip 💡: If you need some extra cash to close on the purchase, Funding Circle can get you the funds in as little as 2 days if you qualify for a Business Line of Credit, Business Term Loan, or SBA 7(a) loan.

✅ Insure your vehicle.

If you purchase a car under your business name (or transfer the title), you’ll need commercial car insurance. On a yearly basis, commercial car insurance costs $600–$2400 for a standard car and $3300–$6200 for a cargo or delivery van.

If you buy a vehicle under your own name and write off the tax deductions for strictly business use, you can stick with personal auto insurance.

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✅ Take advantage of business vehicle tax credits and deductions.

There are so many intricacies to writing off business vehicle expenses, but let’s look at it from the source. 🦅 When deducting this type of business expense on your taxes, the Internal Revenue Service (IRS) says you can either:

  1. Take a standard mileage rate deduction (62.5 cents per mile for the second half of 2022, which the IRS sets to account for standard operations and wear and tear), or:
  2. Deduct actual expenses, aka all your itemized expenses related to the vehicle (like the purchase price, cost of fuel, maintenance, etc.).

You can only deduct a portion of the purchase price if you deduct actual expenses. Calculate your projected number of miles for the year and compare the two options to see which one makes more financial sense.

Interested in an electric vehicle (EV) for your business? Check out the commercial EV credit that’s part of the Inflation Reduction Act. Eligible vehicles under 14,000 pounds qualify for a $7,500 tax credit. Eligible vehicles over that weight threshold get a $40,000 tax credit.

Types of auto loans for business vehicles

  • Small Business Administration (SBA) loans: Business owners can typically use a SBA 7(a) loan to finance a business vehicle. SBA loans may offer better interest rates than other options, depending on your creditworthiness.
  • Term loans: Borrowers typically sign on for a 72+ month loan term at a set interest rate with specified terms. 
  • Business line of credit: Apply for a line of credit to borrow as you need for what you need, including a vehicle.
  • Personal loan between friends + family: Easily set up a custom loan contract with someone you know using Pigeon. 🐣 A legally-verifiable contract can help you pay the down payment, buy out the vehicle at the end of the lease agreement, or finance monthly payments while you get your startup’s cash flow in order.

Smart Tip 💡: UpStart allows you to quickly check which auto financing rates you qualify for with no hard credit inquiry until you actually submit an application. Click here to learn more.

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When buying a car, protect your business from predatory lenders

Did you know that in 2022, a Honda dealership in the Bronx, New York, was court-ordered to pay $1.5 million to settle Federal Trade Commission (FTC) charges for discriminating against Black and Hispanic car buyers? The FTC says Black customers “were charged about $163 more in interest than similarly situated non-Hispanic white consumers, while Hispanic consumers were charged about $211 more in interest.” And that’s just one violation. 🤯

You may be especially at risk if you have a low credit score and are dealing with a non-accredited dealer. If you’re not sure you can find a trustworthy lender in your area, consider financing the full vehicle purchase with a loan through a third-party entity or someone you know. With Pigeon Loans 🐣 offering official, legally binding loan documentation and services for friends and family, it’s a legit option.

Bottom line on business car leasing or buying

If you need a vehicle for business purposes, it makes sense to buy or lease a separate business car. However, there are a lot of intricacies involved like getting the right insurance, taking the right tax deductions, budgeting for lease or loan payments, and more. Once you have that vehicle, your business will be able to grow with every commute.

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