Commercial fleet finance

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    Chris Godfrey

    Page written by Chris Godfrey. Last reviewed on July 11, 2024. Next review due October 1, 2025.

    New business vehicles don’t come cheap and buying big ticket items like trucks, vans and bulldozers out of working capital can impact business efficiency and often be prohibitive. Fortunately, there’s a solution to this problem: Commercial fleet finance. Give your organization the vehicles it needs without hurting cash flow.

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      What is commercial fleet financing?

      Commercial fleet financing – also known as equipment financing – is a type of business loan used to support the purchase of one or more vehicles that are used for business purposes. Typically, this means vehicles such as:

      • Semi-trucks
      • Box trucks
      • Light/medium duty trucks
      • Pickups
      • Trailers
      • Construction equipment – bulldozers, scrapers, excavators, etc.
      • Emergency vehicles – ambulances, fire trucks, etc.

      Commercial fleet finance is effectively a long-term rental agreement, and it is usually employed to purchase or lease more than one vehicle at a time. This type of financing gives organizations an alternative way to pay for essential business vehicles without putting strain on working capital by buying vehicles with cash.

      How does commercial fleet financing work?

      Commercial fleet financing can cover most of the cost of acquiring new vehicles for your business. Available in two main variants (see below), the financing will usually require a down payment from the buyer and then regular monthly payments over a fixed contract period. At the end of the contract, depending on which type of financing you choose, you’ll have the option to buy the vehicle for a pre-agreed price, renew the contract and keep using the vehicle, or give the vehicle back to the finance company.

      Key components of commercial fleet financing

      • Usually used to pay for more than one new vehicle at a time, although solo purchases are accepted.
      • All commercial fleet financing is a lease (long-term rental), but it may give the lessee (you) the option to buy the vehicle at the end of the contract.
      • You will usually need to pay a deposit at signing – often this is equal to one month’s instalment of the lease – although for lessees with poor credit, it could be as high as 20% of the vehicle price.
      • Contract periods are typically 2 – 5 years.
      • Interest and fees are charged on the financed sum and included in your monthly payment.
      • The monthly lease payment is decided by three main factors: 1) The price of the vehicle. 2) The strength of the lessee’s credit – better credit means lower interest and fees. 3) The residual value of the vehicle at contract end. This is an estimate of the value of the vehicle after you have finished using it. Typically, the lower the residual value, the higher your monthly payment.

      What commercial fleet financing options are there?

      There are two main types of commercial fleet finance:

      Operating lease

      An operating lease is a straightforward long-term rental. You pay a deposit and then regular monthly payments over a fixed-term contract. When the agreement comes to an end, the vehicle goes back to the finance company. This type of fleet financing may roll vehicle maintenance, servicing, insurance, even tyres into the deal. A mileage limit is set when taking out the contract. This is the maximum number of miles the vehicle can drive over the agreement period. If you go over, you will pay for every additional mile – which could significantly add to the overall finance cost if your excess mileage is high.

      Finance lease 

      Similar to an operating lease, a finance lease is also a long-term rental, but you have different options at the end of the contract: You can give the vehicle back, renew the lease at a different cost per month, or buy the vehicle for the projected residual value of the vehicle at contract end – this is commonly known as a ‘balloon payment’. In finance leasing, vehicle maintenance, servicing and insurance costs are typically your responsibility. This may make your monthly payments lower, but you need to factor in the added third-party costs. Excess mileage charges also usually apply.

      What are the requirements for commercial fleet financing?

      Obtaining commercial fleet financing is determined by three key factors:

      • Strength of your personal/business credit: Most lenders will want a minimum personal FICO score of +640, although if you pay a larger deposit, it may be possible to get funding with a score in the mid-500s. 
      • The length of time your business has been operating: Longer history improves your chances of loan approval.
      • Your annual revenues: The higher they are, the more likely your application will be approved.

      You will need to provide a bill of sale for each vehicle you are seeking to finance, and the lender may also ask to see your business bank statements and other financial records. Depending on the strength of your application, your initial down payment may be as low as zero dollars, but this could rise to 20% of the vehicle price for applicants with weaker credit.

      What are the pros and cons of commercial fleet financing?

      Like all business loans, commercial fleet financing has advantages and disadvantages.

      Pros:

      • Takes the strain off cash flow
      • Preserves working capital to use elsewhere in your business
      • Can allow you to buy better vehicles than if you were paying with cash
      • Can roll maintenance, insurance and other operating costs into your monthly payment
      • May be tax advantageous

      Cons:

      • Interest charges and deposit can be high for borrowers with weaker credit
      • You may not own the vehicle at the end of the contract
      • Balloon payment can be higher than vehicle is worth
      • Excess milage charges can quickly add up and make the total financing costs expensive

      How do I apply to commercial fleet financing?

      The application process for most commercial fleet financing is straightforward:

      Apply for commercial equipment financing

      You should shop around for different financing offers before settling on a deal. You can do this by approaching banks, credit unions and online lenders one by one, or you can use the services of a loan marketplace that will introduce you to a choice of fleet financing deals from different lenders. Some marketplace platforms can also give you advice and help you with the application process. This can be especially useful for business owners who have never taken out commercial fleet finance before. 

      You will need to provide:

      • Vehicle details including price and details of seller
      • Your business details and financial records as required
      • Where the vehicles will be used
      • Annual mileage request per vehicle (this is the miles each vehicle will drive per year)
      • Contract length request
      • Preferred type of financing – operating lease or finance lease

      Get a determination

      A determination is a pre-offer for fleet financing. It will set out the down payment, interest rates, fees, monthly payment and other conditions of the loan. If you accept these terms move on to:

      Finalize the paperwork

      Receive your approved finance package. This will include contracts containing each vehicle’s VIN as well as the complete terms and conditions of the financing. Sign and return the contracts along with any other paperwork, such as proof of insurance if not provided by the lessor.

      Get funded

      Pay your down payment to the vehicle dealer and let the finance company take care of the rest. They pay the dealer the balance of the vehicle price and then it’s yours to drive away.

      What are the alternatives to commercial fleet financing?

      There are other ways to finance your essential business vehicles:

      • Term loan: This is a straightforward bank loan. You receive a lump sum and pay it back over a set period in regular instalments. Having the cash in your pocket may give you leverage to get a discount on the vehicle price.
      • Use working capital: Use your own cash flow to buy new vehicles. If your cash flow is sluggish, get paid quicker with finance tools such as invoice financing or a merchant cash advance.
      • Asset finance: Use other assets your business owns – such as equipment and machinery – as collateral for a business loan. Continue to use the assets while the released funds pay for your new vehicles.

      Get started with Swoop

      Working with business finance experts can make all the difference when applying for commercial fleet finance. Contact Swoop to discuss your borrowing needs, get help with your application and to compare top quality commercial fleet financing from a choice of lenders. Get the vehicles you need without putting strain on cash flow. Register with Swoop today.

      Written by

      Chris Godfrey

      Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Wells Fargo Bank, Visa, Experian, Ebay, Flywire, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of US consumer and business finance.

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      At Swoop we want to make it easy for SMEs to understand the sometimes overwhelming world of business finance and insurance. Our goal is simple – to distill complex topics, unravel jargon, offer transparent and impartial information, and empower businesses to make smart financial decisions with confidence.

      Find out more about Swoop’s editorial principles by reading our editorial policy.

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