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Can You Use a Business Line of Credit to Buy a Company Car?

When finding yourself in need of a company car for your LLC or other types of businesses, how do you know if you are making the right choice when it comes to financing? It’s important to explore your options and speak with an advisor who understands both your financial situation and the details of your business. One popular approach for financing is to use a line of credit. Learn more below about buying a company car for an LLC using a business line of credit to see if it sounds like a good fit for you.

car fleet

How to Purchase a Vehicle in the Name of a Business

In the United States, it is possible to obtain a car loan under your business name. While a sole proprietorship is not permitted to purchase a vehicle, a limited liability company or corporation is. Before you can begin, you must establish business credit, which can take up to two years.

Acquire a federal tax identification number. To establish business credit, you’ll need an IRS-issued (EIN). You can apply for an EIN (employer identification number) online.

Alternatively, you may use IRS form SS-4, which is available on the IRS website.

Talk to a CPA to determine the best course of action for purchasing a car through your LLC. You can build your business’s credit by buying a vehicle through an LLC, but the LLC is responsible for any damage to the car. 

However, depending on the structure of your LLC, it may provide tax benefits; therefore, consult your CPA to determine the best format for your business.

Create a credit bureau account. Contact Dun & Bradstreet, the most prominent business credit bureau in the United States. You can create a business profile and attach documents such as financial statements. 

Create an account on Dun & Bradstreet’s website.

You must have at least three trade lines to obtain a Dun & Bradstreet credit score (called a Paydex score). Large retailers such as FedEx, Home Depot, and Staples carry trade lines.

Request that the vendor reports your payment information to Dun & Bradstreet if they are not already doing so.

Increase the credit score of your business. It may take your business up to two years to build up enough credit to qualify for a car loan. For you to achieve the highest possible credit score, take the following steps:

Make on-time payments on your bills. A history of timely payments will assist you in improving your business’s credit score. Additionally, timely payment is critical, as this is the only way to earn the highest Paydex score.

Avoid excessive credit usage. Utilize no more than 20%-30% of available credit. 

Conduct a thorough audit of your public records.  Make every effort to resolve a client’s debt and obtain the lien’s release. Your credit score includes any bankruptcies, liens, and court judgments against your business. These items all affect your credit score negatively.

Consider whether a guarantor would be beneficial. Specific lenders will refuse to finance an LLC without a guarantor. The guarantor’s credit score will determine the financing. 

One challenge is if the guarantor has an excessive number of vehicles registered in their name or has poor credit. The car for your LLC may be denied or approved at a higher rate. Another factor is your debt-to-income ratio and how it affects your LLC’s credit.

Purchasing the Vehicle

Confirm your business’s creditworthiness. Before visiting a dealership, you should obtain a copy of your business’s credit report from the three major credit bureaus: 

  • Dun & Bradstreet 
  • Equifax 
  • Experian

 

Companies have credit scores ranging from 0 to 100.

You must pay to view your business’s credit score. Separately, contact each bureau. Experian can provide you with your credit history, Equifax can provide you with your Equifax score, and Dun & Bradstreet can provide you with your Dun & Bradstreet report.

At least an 80 credit score is considered satisfactory and should qualify you for loans.

Consider leasing a car rather than purchasing one if your business’s credit is spotty.

Identify dealerships that specialize in commercial sales. These divisions are devoted to assisting businesses with vehicle acquisition and registration. 

Visit a dealership and inquire about the availability of a commercial sales department, which may streamline the vehicle purchase process.

Choose a mode of transport that is appropriate. For instance, if you own a catering business, you may need to purchase a minivan. On the other hand, buying a sports car may raise red flags with the IRS.

Never use your business to purchase a vehicle for personal use.

Financial data should be supplied. You will find that Lenders will want to see a variety of financial documents before extending a loan. They may, for example, request access to your business’s financial records, such as its balance sheet.

Additionally, you can anticipate the lender conducting a credit check on you. As a result, you should request and review a complimentary copy of your credit report. Resolve discrepancies with the credit reporting agency if the information contained in the report is incorrect.

Finance your business in the name of the enterprise. Financing is available through the dealership or local banks and credit unions. Always indicate that you are applying for a loan in the name of your business.

Comparing interest rates and other loan terms enables you to secure the best possible deal. You should not assume that the dealership is offering the best value, even if it is the most convenient option for financing.

Guarantee the loan. Your business credit score may be insufficient to qualify for a loan in your sole name. The lender you chose may require you to sign a guaranty. This “guarantee” means that you are personally liable if your business cannot repay the loan.

Before proceeding, carefully consider your actions. To collect on the loan, the lender may sue you and seize other personal property.

Pay your loans on time. Always make car payments using your business bank accounts. Payments made from personal accounts create the impression that your business is a sham.

Purchase insurance. If the vehicle is primarily for business purposes, you should consider purchasing commercial auto insurance. On the other hand, maybe personal auto insurance is preferable if you only use the car for business purposes part-time. 

Take into account the number of additional employees who will be driving the car.

You can get insurance from several major insurers, including Geico, Allstate, and Progressive. Additionally, consult your telephone directory for local insurers that may offer lower rates.

If you’re unsure how to proceed, contact the insurance agent who sold you business liability insurance.

Register the vehicle in the business’s name. The laws governing automobile registration vary by state. You will undoubtedly be required to demonstrate your business’s proper organization by submitting copies of your Articles of Organization or Incorporation. Contact your state’s DMV for registration information.

Claim a tax deduction. The tax rules are complicated. The rules differ depending on whether:

  • an LLC owns the vehicle 
  • a single-member LLC
  • a corporation
  • or a partnership

 

Consult a tax professional for additional information. Make sure you send a member or manager of the business to register the vehicle, not an employee. 

You should pay all of the registration fees from your business bank account. Personal checks are not required.

If necessary, keep a mileage log. You can use the vehicle for business or personal purposes. However, you may deduct only the portion of the cost that is related to your business. 

Maintain a mileage log, if necessary, in which you track your business-related travel.

OTHER CONSIDERATIONS:

Buying New or Changing Ownership

The first thing to consider when buying a car for an LLC is whether you want to use the personal car you already own or buy a new one altogether. If you choose to use a personally owned vehicle when you first start your business, it will most likely be considered a capital donation. You can also have the company purchase your vehicle from you for its fair market value. This may save the company some money, but buying new means you can choose a car with the exact specifications needed for your company’s operations.

Single Car or Fleet

It is also a good idea to consider the number of vehicles needed. If you can sufficiently run your business operations with only one vehicle, great. But in many cases, a fleet of vehicles is needed. Often, you can work directly with manufacturers to get several of the same vehicles for a better price. Just make sure you are aware of the terms and the minimum number of vehicles required.

Financing Options

Once you have determined your company’s needs and chosen the vehicle(s) you wish to purchase, you need to consider financing options. There are several financing options available including business loans, capital loans, and lines of credit.

Make an appointment with a lender or financial advisor who has experience with businesses like yours. Choose someone you trust who will keep you well informed and guide you through the financing process. Sunwise Capital works with small businesses to help them obtain the financing they need to grow and reach their goals.

Business Line of Credit

One popular choice when it comes to buying a company car for an LLC is using a business line of credit. With this type of financing from Sunwise Capital, you can get approved quickly. We use a soft credit pull, which will not affect your personal credit, but you will need to have a good credit history. You will be approved for a total possible amount and then will be required to make payments on what you actually use, similar to a credit card.

Sunwise Capital

Sunwise Capital was created by former small business owners and is focused on providing assistance to current business owners. We make it our goal to provide you with all the tools you need for success and to help you make smart financing choices. We do not require you to fill out mountains of paperwork like other lenders. Plus, we can customize loan options to meet your individual needs.

Contact Sunwise Capital today to speak with one of our loan experts and get more information about financing options for buying a company car for an LLC.

Take Your Business Further With A Loan From Sunwise Capital