Rob Misheloff
Navigating the world of commercial auto loans can open new doors for your business.
In this episode, finance experts Alex Jackson and Eric Raymond offer valuable insights and practical advice on securing commercial auto loans.
They'll break down the current market trends, explore different loan options, and share tips for getting the best financing deals.
Whether you're expanding your fleet or just getting started, tune in to learn how to make informed decisions with commercial auto loans and steer your business towards success.
Transcript
Welcome to the Smarter Equipment Finance podcast. My name is Alex Jackson. I'm with Eric Raymond, and we're here to talk about auto loans today. So imagine that you're a family owned business and you're doing your mom pop shop, and then all of a sudden you get the opportunity to really blow up and be the city's top supplier. But you got a problem, the issue. You do not have enough delivery vans for the demand that you're getting, and you need it fast.
What do we do?
There's several things you can do, and it all depends on which direction you go in to get the best value out of what you're choosing to do for your business. Granted, there's a few puzzle pieces needed to secure an approval for a commercial auto loan. But, Alex, let me ask you.
What would be the difference between doing an auto commercial loan versus say, if I just did it personal under my own name?
Yeah. So so why would I wanna use my business credit over my personal? Well, for one, if you ever want to get exposure for yourself on your personal side of things, you have your home life, your family life, you want more auto loans, you wanna get a mortgage, you definitely don't wanna be getting all your vans and your personal credit. Absolutely not.
Because it's gonna give you a lot of exposure, and it's gonna affect you even getting possible homes. Are you getting personal auto loans for you, your family, whatever the case might be. So it's always a really good idea to separate those out. Plus, you know, we're gonna talk about if something was to happen to your business, you don't want to be personally obligated to that issue.
You wanted to kinda separate those lives out a little bit more.
Now I'm a business owner.
I have decent credit, but I've never financed anything under my business before. I say it that way because this is something I run into a lot myself when I talk to my own personal customers, and I try to explain it like this. Everybody wants the best rate, and everybody wants to pay the least amount of money. But I think we can all remember when we were eighteen, nineteen years old walking into the car dealership for our first car. That salesman was salivating.
He was ready to sell us a car He was ready to make that money. Interest rate that was off the edge.
Okay? And I feel it's a lot of fear that we run into today. Though personal credit, no matter how strong it is, we will still be looked up as a startup if we do not have credit to begin with. So what I always try to suggest, try to recommend is like what Alex said.
As soon as possible, start that business credit. Because no matter what, once it starts, let's say we're able to secure an approval for your startup business, year from now, two years from now, when we go to sell you another piece of equipment, the terms are much more tasteful Mhmm. Than what they were in the beginning.
And that's very important to, you know, really digest is the first the first transaction is always gonna be the worst no matter what. Whether it's down payment, whether it's the rate, or, you know, whatever the terms may be, even like shorter term and you wanted a shorter monthly payment. But the first transaction will always be the most painful. But as long as you have a good track record with that first transaction, then you know you're gonna be set up for so much better in the future.
Every transaction after that, you can get a approvals, you know, no down payment, sixty months, seventy two months, low interest rates. You're gonna get all of it. But sometimes you gotta bite the bullet in the beginning. Right.
And so it's just important for people to know that and not to be scared of the numbers, especially as a first transaction. You know, maybe a couple transactions in, but if your credit's not the best, you just gotta be understanding of that.
Right.
And at the end of the day, everybody needs money. It's just how much is it gonna cost you to borrow it.
And that's honestly something I'm kinda glad that you brought up because one thing I wanna talk about to me that's really important when I talk to my clients is everybody's really focused on an interest rate. I think the primary focus should be, first, how much is the monthly payment? How much can you afford? How much is the equipment gonna generate revenue?
Like, how much is that equipment gonna generate for you? If it's gonna generate three, four times the monthly payment, screw the interest rate, you're gonna be able to in most of these, agreements, you're gonna be able to pay it off early anyway. And so you can just alleviate most of those finance charges. But the one thing that frustrates me the most on this side of things when I talk to business owners is that they get so fixated on a rate.
When the reality is if you just break down the rate from a month to a day to an hour to a minute to a second, it's like, sense. It's it could be twenty, forty dollars a month. So you're telling me twenty, forty dollars a month is holding you back from generating an additional twenty five to thirty thousand a month when you're just gonna do so many beneficial things, commercial credit, you're gonna take advantage of section one seventy nine, you're gonna be able to generate so much more revenue and building more fleet for yourself, providing jobs for other people, hiring more employees.
There's so many things that I think come into play that people don't think about, and they're so fixated on a number when I don't think that should be the primary focus.
What I kinda experience on my side is, the same.
But one of the things I try to explain to my customers is, look, are we not making this purchase to make money?
Okay? Though the rate is important, I'm not saying it isn't. Is the term important? Of course, it is.
Okay? But if we're purchasing this equipment to turn roughly anywhere between ten, fifteen, twenty thousand dollars a month, humor me and tell me you're gonna hold this for the next five years. You're not going to. So at what point does the rate really matter when it comes down to financing this equipment for the business?
It should be more dialed into what are we making and what are we gonna get out of it. Now that may sound a little aggressive, but when it comes to start up businesses, it is not in my intention to start anyone underwater, of course. No.
Hell no. Yeah.
But it costs money to make money. It does. Okay? And in the beginning, it costs more than it did if you were in business for five years or ten years.
It all has to do with risk and where we're at economically in the world. One thing I always tell my customers though is, you know, I have your best interest in mind. I am not gonna hold your hand into the darkness. I want you to be just as successful as you are today moving down the road.
The only reason why is, if I don't do my part, you're not gonna call me to buy more equipment.
So and the idea is to borrow money to make money, and the end result is business growth.
Yeah. The primary focus is gonna be what's best for the customer. If it's if it's a rough deal, be honest. Hey.
This is all I can get you. This is kinda, like, all you really that the lender feels you deserve. You know, these are things you can do. We can kinda I'll kinda guide them and tell them, you know, this is is what I would recommend.
You know, you could do this in the future to get a better deal, but, really, you're in a position right now where you gotta make the decision of getting the equipment, making some money, or waiting and not making that money and not eating the first little bit of a poor transaction, if you will, and just kind of growing from there.
We deal with a lot of different customers, whether they have millions of dollars in the bank or they have a hundred.
One thing that I've realized that I've come across, and I wanna see if you agree with me is, when we talk to the smaller end clients, the clients that, function in a much smaller market, Do you feel a difference between how they feel versus the guy who has millions of dollars in the bank with the fleet of twenty rigs already? Is there a difference between the two? Is there a reason why a small business owner should feel, shy maybe to talk to, equipment financing.
What what's your take on that between the two different customers?
You know, well, I think that there there obviously is a difference, but I think one of the biggest misconceptions is that a startup doesn't have the opportunity. A lot of people won't even reach out. Like, if they're a startup, they don't reach out. They just think that because it's a commercial loan and they have no, like, established business or any fleet currently and they're just starting up, but they can't qualify or apply for anything. That's quite the opposite, actually. There's a lot of opportunity for startups.
That's something we'll go into a little bit here shortly is, kinda asking about startups and, like, what the requirements are. But to answer that question is ask, apply, because there absolutely are startup programs out there with tons of commercial banks and lenders that will take you in to consideration. Although, something to really, really consider is, you know, you definitely wanna have some good personal credit behind you. So, one thing that I learned as I, you know, have been working here for a while, is to start your own business, you wanna start building some good commercial credit or, excuse me, personal credit.
You wanna build good personal credit, whether it's trade lines, get some good credit cards, maybe auto loans, build up a good year or two of transactions on your credit line, and that point you should be able to apply. And as long as your credit score is anywhere between six forty and seven hundred, even if you just started yesterday, we absolutely could find an option for you just to start building that commercial credit, start building your business up, growing and expanding is very important. I think the misconception there is that because they just started, they can't do anything. But I wanna make sure that's not the case at all.
When business credit doesn't exist, there's only one thing to look at, and that's the business owner. Yeah. K?
How they reflect to us is how the business is gonna reflect to us. Okay? And, you know, I I kinda wanna double on what Alex said. A lot of people just don't even ask. A lot of people are afraid. They feel like they already know the answer. And I think me and Alex both can attest to the fact that we both have had customers that didn't think there was a chance.
Okay? And now they're growing fleets right now. Okay?
So though personal credit is extremely important, being adamant on the fact of establishing business credit is just as important.
When it comes to start up businesses, we're really trying to grab a hold of anything we possibly can to hold our hat on for the lender to give you an approval.
Without trucks and fleet and several other things, it becomes difficult but we look for other, let's say, items, other puzzle pieces to, make the deal work.
Now requirements when it comes to commercial auto loans, let's say for a start up business Alex, what type of credit score are you looking for on a start up business?
Well, we can, as of recently, go as low as six forty. Six forty to seven hundred. Seven hundred is typically what you want, but we can go as low as six forty.
What about tell me about terms and Terms. Rates.
Terms and rates are fun because that's what everybody wants to know. Well, what's my term? What's the what's the rate gonna be? Well Sir, we just met.
Yeah. Sir, you're on page twenty seven. We're on page three. Let's relax.
So here's the answer that nobody wants. It solely reflects on the business owner. What type of credit you have? Time and business and cash flow.
There are three legs that are absolutely important when it comes to commercial financing, especially when it comes to commercial auto loans, and it is a repeat of what I said.
Time of startups.
Right? On startups. Right?
On startups. Yeah. We got well, on startups, we're we're dealing with six forty and above. Okay?
But when it comes to rates, solely reflected on the business owner. Where's your credit at? What are you working with? Time in business, etcetera.
Absolutely.
I, do wanna touch base on, the requirements of a startup. So to be clear, start up a business, I need three months bank statements that has money in it.
Twenty to thirty percent of the asking amount, they need to see in the bank.
So if we're asking for fifty thousand dollar piece of equipment, we're gonna wanna see at least fifteen thousand in there because why? Because every lender, doesn't matter where you go, as a start up, twenty percent is gonna be required as a down payment. They don't wanna take all your money. They wanna see you have a little bit in reserve, so they wanna see a little bit of capital. So thirty percent of asking amount and then the bank statements, twenty percent always requires a down payment. So three months bank statements, twenty percent down payment, six forty to seven hundred credit score. What I do wanna talk about too is credit score.
Score is just a is a number, of course, but it's a story of the score that's important. What I wanna kinda, like, touch base on is if if I have a six hundred forty seven hundred credit score, I'm like, yeah. I got I got the credit score. Let me go apply.
But the story of the score is very important. So, you know, is there any, like, past collections on there?
We wanna have we wanna see five to seven trade lines.
Auto loans help you. Minimum. Five to seven trade lines. We wanna see that.
What's a trade line, Alex? Trade line? Like, credit cards, auto loan, installment loans. Okay. Anything pretty much that involves using your social to kind of get.
It's just very important. And the reason for that is because the lenders wanna see credibility. If you have no credibility, how are they gonna know you're gonna pay anything back? That's why auto loans are very important.
If you pay on an auto loan for twelve to twenty four months, good payments, you can actually use that as incredible credibility. It's called comparable debt, by the way, in the industry that the lenders look for. So fifty percent of comparable debt is what they look for. So if you have a twenty four thousand dollar auto loan and you're applying for forty eight thousand dollars vehicle, it's pretty much a green light.
Assuming everything else lines up, you know, bank statements and, you got money in the banks.
Like Alex said, credit, it's a number. Get over it. Okay? But it's a story behind it.
What do you got going on in there? Okay? Right now, I got a six eighty something on my desk with zero percent credit availability. Yeah.
Not happening.
No. Yeah. It's not happening.
Credit availability is when you have too much revolving debt on your credit cards, whether you pay it off, this, that, the other. It's always the name of the game when it comes to reporting. All these little minute details all play a role in securing an approval, especially on titled equipment. What businesses that generate revenue within transportation, whether it be local or over the road or vocational?
Which ones are easier and which ones are harder?
That's a really good question.
So I'm gonna break this down because it ultimately blows down into the industry, but we're gonna just talk about transportation general or general freight, hauling goods.
To be quite frank, transportation is one of the riskier industries. It's got a very high default rate, especially with start ups. So especially when it comes to kind of rates, when it comes to rates for trucking in general, all lenders are gonna be higher just because of the default rate that's there. Over the road is gonna be significantly more risky, primarily because the truck is going over border, over the, you know, state lines.
So a lot of times, there's a lot of risk involved due to them just if the truck breaks down, then backing out. Price of gas is a lot more expensive.
Local, a lot more reasonable. It's definitely a lot easier. However, it's still considered transportation.
It's gonna be difficult either way. You're gonna wanna have a good amount of established experience in the industry for sure.
No matter what vehicle we choose to purchase, if we do not have three years of industry experience, when it comes to start up businesses, experience is everything.
If you don't know what you're doing, it's hard to get the trust out of me or the lender that you actually know what you're doing.
Yeah.
And what that does is when we have that three years, it alleviates a good amount of risk. I'm not gonna say all of it because, hey, none of us are dumb. Right?
Yeah.
But when when we can hang our hat on the fact that you have done this, you do know what you're doing, it gives us a green light to keep digging for that approval that you so deserve. Okay? And I will say this is probably one of the most grueling stipulations in this industry.
I don't know why.
Well, jeez. I wonder why.
But it always comes down to the three years of experience. And right now, if I only had to choose if I only had to show one year of industry experience, hey, Alex. I wanna be driving a Volkswagen outside. Okay?
So these are all things that are extremely important when it comes to securing that approval. You know? For the start up, everybody's afraid of the the rate, the term, this, that, the money. Well, have you ever driven before?
You we're not even thinking about well, how about when you get behind the wheel? You ever taken a left in a truck? Right? So it it it it what I try to explain to my customers, it's the difference between dreaming and reality. Okay? I hate to be that guy, but I'd rather be me than the bank hitting you with a hard, hard inquiry just telling you no and not giving you an explanation.
Here's where we're at. Here's what we need. Give me a call when you're ready. And, you know, I feel like a lot of people do not know that. When I got into this industry, I did not know that. Okay?
We talked about OTR, local, vocational. Right?
But one thing that kinda throws a crowbar into all of our game is what is the vehicle or equipment actually being used for?
We have we we like I said, we have vocational. We have over the road. Is it going over the road? Well, what are you doing?
General freight? Is it a reefer? What's going on? Is it local? Well, what are you doing?
Is it just a truck to pick up equipment, drop equipment off? It gets treated differently Transportation, sleeper trucks are very high risk.
However, if you're running a construction business and you're using it to haul your equipment from site to site, job, whatever the case might be, that's different.
We're gonna it's very important to understand what the industry is and what they're qualifying for. General Frey, yeah, we got one into that. You know, that's very risky. But, again, industry, important. If if we wanna make sure we ask all the right questions.
The attention to detail that we have for your deal will vastly outweigh what anybody else is attention that they give you. Okay? If we can find a way, we will. And it sounds kind of silly that little details like this could completely change an entire deal. But it is true.
It is very true. I share a story real quick. I had a gentleman. This is about a month ago.
He called in, and he was like, hey. I'm trying to get trying to get this utility vehicle. I just it's no one can approve me because I'm a start up, and then my, credit's just not the best, and I can't get qualified. So ask all the questions I normally do.
This is where experience really is important, in this industry. So I asking all the right questions, I find out that previously to him establishing his LLC, he was actually sole proprietor. No one no one cared to ask him that.
How many years of time in business did you get, mister Alex?
It was, like, seven years. He had been a sole proprietor, so it was, like, it was, like, two thousand seventeen or something like that. So, of course, I just asked for the tax return. I got him an approval, zero down, great rate, approval quick. He was so happy. So The point is, yeah, experience, asking the right questions is very important.
And I don't know.
I've I've I've well, alright. Let's let's be fair. I sit next to Alex. Alex sits next to me. Okay? We don't have customers. We have friends, man.
Yeah.
We get on the phone. We talk. We try to help. Of course, there's loans and all the mumbo jumbo and all the stuff nobody wants to hear.
But at the end of the day, we can have a laugh with you on the phone, but then when that phone hangs up, I've seen Alex's magnifying glass. It's like this big. Pulls it out and just starts looking for the littlest minute little secret or detail. And, you know, and that's what it comes down to.
This is not black and white. I will tell you that. I have learned that being in this industry. There is a fine bit of gray area, and it's whoever asks the right questions Mhmm.
Can get usually to an approval pending there isn't a nightmare on credit or whatever. You know what I mean? But and and I I really, really, really love that story because how many people did this guy call in the country?
You know, I'm not a hundred percent sure, but the way he's made it sound was a lie. He said he'd been through a lie, and he was to the point where he was at the end of his road, and then he was the one calling other finance companies to figure out which I have a hard time. Believe me, no one even cared to ask that question because that's one of the first questions I asked. So, oh, yeah. I've been a sole prop since two thousand seventeen.
And then did they did they ask you before? He said no. Okay. Well, this this might be a home run right here.
You know, you when you get, like, a deal from, like, another person or whatever the person's just done with them, and you start going through the files, and you're, like, yeah. But did you send this one thing? Nobody asked me for it. Immediately, I know. Oh, we probably got a deal here.
Yeah.
So yeah.
And, that's awesome. That that is absolutely awesome to bring that up because that's what it comes down to. It's just how who can make it make the most sense.
Yep. Yeah. And, I mean, another thing to take take into consideration as well is lenders are always changing every month, every week. I mean, just depending on, like, the economy and what their defaults are like, if they're better or they're worse, things can change. So, it's just an you know, every month by month, let's just see what happens.
And I think, I think there's a little bit of a negative essence when it comes to financing. You know? Yeah. Of course.
End result is They're taking my money. And and the funny thing is they're taking they're taking my money, and they're making a profit within the first month.
But no one looks at it like that.
But but at the end of the day, it costs money to make money.
Mhmm. Right? And it could be a very fearful thing to do. It could be, you know, I I can remember going in the car dealership and just kinda slitting.
Here we go.
You know, when you're a kid, you know, you ain't got much money or whatever.
You you you know what I'm getting at here, you know. And I can assure you, it is not like that.
Okay?
My myself and Alex, no matter what the situation is, no matter what you're dealing with, depending how bad, I may have a laugh with you. But I will tell you, we will try and get you on the absolute best path possible when it comes to securing approval for, equipment or titled equipment, like commercial auto loans, etcetera.
Now, we kinda kicked it around. Different people from from all walks of life backgrounds or whatever.
Who would be a good fit for a company like ours when it comes to a customer?
Talking about, like, commercial auto loans.
Well, there's a lot, actually. There's a lot of industries. I personally, primarily focus on the utility vehicles, so general contractors, you know, between plumbing and construction.
For me, most commercial commercial auto loans come from, box trucks, utility vehicles, sprinter vans, even sometimes larger pickup trucks. You know, if they're using it for their business, you can get that under, commercial credit as well, which in some situations, that might be kinda almost consumer territory. So it just depends how the presentation is, but it can happen.
Well, to be fair, Alex, I don't think you're, gonna finance a Prius. Right? No.
Well, I mean, who am I to say? I don't know. I don't know. They might be cleaning an apartment.
Who knows? I don't know. If you make a dollar with a shirt, give me a call. We'll figure it out.
But, but yeah. Okay. And I I I kinda do I kinda do a step off from the side. Like, I do box trucks.
Mhmm. I do utility vehicles.
I do box trucks where the box truck is purchased, and then they wanna install equipment to the box truck. Now if anybody is listening that is trying to do that or want to do that, I highly advise you own the box truck outright and the title is in your name and there is no lien holder, or we finance it altogether. When we start adding different lenders, different owners of the, let's say, the box different bank for the box truck, different bank for the equipment, we all start dealing with huge headaches. So trying to keep it all flush and in line is incredibly important when we talk about securing approvals.
Now the fun part though is whatever we got you approved this month may be different next month. Yes. It might be different the month after that.
Portfolio has changed quarter to quarter, month to month.
If I could control that, man, that would be awesome.
You mentioned something that kinda, I thought about is, business owners. Multi if we have multiple business owners, I wanna be very clear that this could very well change the decision of a lender depending on who you're partnering with on your business.
Who go off of the business, whoever's business owners have to be included unless they're, like, five percent owner, which most of the case is not. Usually, it's, you know, three owners, thirty three percent.
It's twenty five twenty five percent twenty five percent and up PG ing.
Right.
I don't do too many brokers.
There there are you know what? I even as low as ten or fifteen percent, they have the PG. So That's right. I see. Okay.
So it's very minimal. It's easy. Yeah.
You everyone's gonna be on the low majority of the time.
So I say this because if I'm to start a business or you start a business, whoever starts a business, it's very important to pick your business partners correctly. You know? They will be Googled.
Yeah.
So, like, if I have seven hundred credit, you have five hundred credit, and we're trying to apply for something Oh, great.
The way that they score that is gonna be on the lower credit. So they're gonna score off of your five hundred. They don't do, like, an average of two or base off the person to hire. Unfortunately, they base it off of the lower.
So it's just something I wanted to talk about, and just keep in mind also, like, if you're business owner somebody or you have an investor I've been in situations where, like, oh, he's an investor. He wants nothing to do with it. Well, he's on the business. I can't do anything unless he agrees to sign.
So you got experience?
Yeah. No. He's an investor. He's like, I just wanna make money. Well, unfortunately, I just want you to know the logistics of how this works.
Thank you for watching the Smarter Equipment Finance podcast.
Just listen to me and Alex talk our heads off. We do appreciate you listening in. And if there's anything me or Alex can do for you when it comes to assistance on equipment financing, we would love to hear from you.