Ins and Outs of Commercial Truck Financing - Heartland Financial Group

Ins and Outs of Commercial Truck Financing

To get into the trucking business, you first need a truck. New trucks, however, are incredibly expensive – a good truck can put you back six figures and leave you in a mountain of debt if you aren’t prepared for the purchase. Commercial truck financing can help you offset the operating costs of a truck through your business. It’s all about finding the right financing partner and figuring out a lease or loan agreement that best suits your financial and commercial needs.

Commercial Truck Financing or Leasing?

When considering commercial truck financing, you must ask yourself whether you’re better off getting a term loan/equipment loan or looking for an equipment lease. The main difference is ownership – with a loan, you borrow money to buy a truck outright and make it your very own piece of property. You own the truck. It is yours. However, if you default on the loan – meaning, you can’t pay it back – you will have to part with your truck, as most equipment loans use the equipment the loan is meant to purchase as collateral to secure the loan.

The benefit for you is that equipment loans are usually easier to qualify for than cash loans, while lenders can rest assured that if the borrower can’t pay back their debts, they can at least reappropriate the equipment their money paid for. With a lease, the truck isn’t quite your property just yet. Some leases are structured to allow you to benefit from ownership on paper, but you aren’t the property’s owner until the lease is over. Other leases are simple to rent agreements – the company providing the financing or the vendor continues to own the vehicle while selling you operational rights for a fee.

Capital Leases vs. Operating Leases

Whereas an equipment loan guarantees that you become the sole owner of the vehicle when all is said and done, it’s also a tougher pill for most would-be truckers to swallow because it often requires a significant upfront investment in the form of a down payment and may leave you saddled with an expensive yet outdated piece of heavy machinery. While the trucking business is long-term, these vehicles are constantly updated regarding fuel efficiency, safety, and convenience.

Commercial truck financing also makes more sense if you’re using your trucks seasonally rather than year-round, ensuring that they aren’t just wasting away at a lot for a significant portion of the year. On the other hand, if you’re in the process of building a long-term fleet and want to acquire several trucks over the next decade, then a loan or a capital lease might make the most sense. Instead of paying for operational rights for a period of time, capital leases and loans allow you to own the truck at the end of the term. The main differences between a capital lease and an equipment loan are the technicality of ownership and the rules around a down payment.

Technically, you aren’t the owner if you lease a vehicle through a capital lease. Furthermore, while most loans require a down payment, they are usually optional with a lease. You can lower your monthly rates by paying down the value of the investment, but if you don’t, you can continue to utilize your truck from day one. Capital leases and equipment loans are functionally similar in accounting practicality and tax purposes. Your choice between a capital lease, loan, or operating lease boils down to your financial capabilities, prospective financiers’ terms, and long-term business goals.

No Down Payments, Lower Qualifications

The benefits of an equipment loan over a cash loan are plain. Most lenders are willing to be flexible and negotiate on the terms of an equipment loan versus an unsecured cash loan, especially one large enough to finance the purchase of a truck. Similarly, equipment loans usually offer better rates with the added caveat that you are limited to the lender’s choice of vendors or truck carriers. Even if you get a lower rate by securing your cash loan with the purchase of a truck, it’s likely you would get a better deal looking for a financial partner or a vendor specializing in commercial truck financing.

On the other hand, a truck lease spares you from making a down payment and may even grant you greater flexibility in terms of payment schedules and payment plans. Suppose you need the truck on a seasonal basis. In that case, you can arrange a 5-year plan that gives you six months of operational access for six monthly payments at a set price – rather than renegotiating the deal yearly and dealing with inflation.

You can lease or borrow money to buy a used or new truck. When leasing, it’s usually best to go for second-hand, albeit current or last-year trucks for short-term operational periods, such as two-to-four years. On the other hand, expanding your fleet is best to take out an equipment loan for a new truck. The proper qualifications are always paramount regardless of how you finance your truck. If your credit history is poor or nonexistent, it will be harder to convince a significant lender or company to give you a truck or a large amount of money.

Common Equipment Finance or Lease Agreement Documents

Some of these are similar to the requirements you might see for a personal loan. There are numerous benefits to a lease over a loan or an outright purchase – purely paying operational fees often saves you the headache of paying off ownership-related taxes and registration costs. In many cases, insurance is part of the package. The main downside to an operating lease is that you don’t own the truck. But that also means you don’t have to bother trying to broker a deal to sell it when it’s time for an upgrade. Before you make your choice, consider speaking with a financing expert to discuss your current circumstances.