Small business owners looking for a vehicle for their business or personal use may be able to get a loan from the U.S. Small Business Administration (SBA). The SBA offers several loan programs to help small business owners with financing, one of which is called the 7(a) loan program. This program provides businesses with up to $5 million in financial assistance and can be used for various purposes, including purchasing vehicles.
Can I Use an SBA Loan to Buy a Car?
Yes, you can use SBA Loan to buy a car. However, the loan is intended for business purposes only and must be used to support and maintain the business’s ongoing operations.
While the loan may cover some operating expenses, such as payroll, rent, and utilities, it cannot be used for personal expenses, such as buying a car or paying off individual debts. If you need financing for personal expenses, you may explore other loan options designed specifically for personal use.
When buying a car with an SBA loan, you should know some critical points before applying. First, you must meet the eligibility requirements laid out by the SBA and other lenders. These criteria typically include demonstrating sufficient creditworthiness, solid business plans, and generating enough income to repay the loan. Also, you need to ensure that the type of vehicle you’re buying qualifies “business” according to tSBA’sA’s guidelines—for example if it will be used for advertising your business or transporting goods for your business—to qualify for an SBA loan.
The SBA loan can be used to cover a wide range of expenses that are necessary to keep the business operating. Here are some examples:
- Payroll expenses (including salaries, wages, benefits, and bonuses)
- Rent or mortgage payments (for business property only)
- Utilities (electricity, gas, water, and internet)
- Working capital and operational expenses (inventory, supplies, and raw materials)
- Accounts payable and other debts (including payments to suppliers and vendors)
- Marketing and advertising expenses (including online marketing and social media ads)
- Equipment and machinery purchases or repairs (including maintenance and upgrades)
- Business insurance premiums (including property and liability insurance)
- Professional services fees (such as legal and accounting services)
- Taxes (including income tax, property tax, and sales tax)
- Other expenses necessary to keep the business operating
The process of obtaining an SBA loan involves filing an application package with all relevant information about your proposed purchase included in it. Your lender will review this application and decide whether or not you can qualify for a loan based on their assessment of your ability to repay the debt and other criteria they use when deciding on loans. If approved, your lender will determine how much money it will lend you and agree upon an appropriate interest rate, given your creditworthiness and other factors, such as the risk level associated with the loan.
If approved, most lenders will require that you put down at least 10 percent of the total cost of the car as collateral against your loan before they disburse funds towards your purchase. Additionally, lenders generally limit how much they are willing to lend towards any single item purchase, such as cars, so be sure that what you plan on buying falls within those limits before beginning negotiations on price or obtaining financing elsewhere if necessary.
The SBA EIDL loan can be a valuable source of financing for small businesses, but it is essential to use the funds wisely and avoid common mistakes. Here are some mistakes that business owners may make when using an SBA loan to buy a car:
- Using the loan to buy a car for personal use: As mentioned earlier, the SBA loan can only be used for business purposes, and it is not allowed to purchase a vehicle for personal use. Personal use of a company vehicle generally results in taxable wages for the employee.
- Buying an expensive car: While the loan can be used to purchase a car, it is essential to ensure that the vehicle is necessary for the business and not overly expensive. Buying a luxury car or vehicle beyond the company’s needs can lead to financial strain and repayment difficulties.
- Not comparing loan options: Business owners may make the mistake of accepting the first loan offer without shopping around for other options. Comparing interest rates, repayment terms, and fees from different lenders is essential to finding the best deal.
- Failing to plan for maintenance and repair costs: Cars require regular maintenance and repairs, which can be costly. Business owners should factor these expenses into their budget to ensure they can afford to keep the vehicle running.
- Not keeping proper records: It is essential to keep detailed records of all expenses related to the car, including purchase price, insurance, maintenance, and repairs. This will make it easier to track the costs and deduct them from tax returns.
By avoiding these common mistakes and using the loan funds responsibly, business owners can make the most of the SBA EIDL loan to purchase a car for their business.
For those seeking an affordable way to finance their car purchase without breaking their budget or having astronomical monthly payments, taking out an SBA loan can be very beneficial. However, potential borrowers must meet the requirements to offer approval on such loans. Additionally, borrowers should remember that certain types may not qualify under specific Small Business Administration regulations. Research should be done beforehand to determine if funding can be obtained through an SBA-guaranteed loan product before making any agreements with sellers or other lending institutions regarding vehicle purchases.
Please read our article about SBA Loan Status Disbursed Current. Additionally, learn more about Bankruptcy Clear SBA Loans!
After leaving Wells Fargo Bank in 2014, Daniel began a career as a finance consultant, advising companies and individuals on economic policy, labor relations, and financial management.
At Promtfinance.com, Daniel writes about personal finance topics, value estimation, budgeting strategies, retirement planning, and portfolio diversification.
Read more on Daniel Smith's biography page.
Contact Daniel: daniel@promtfinance.com