How to Acquire Food Truck Financing

If you want to take advantage of the growing trend in the catering industry, consider starting a food truck business. From 2014 to 2019, the annual growth rate of the food truck industry was 6.8%, and the total revenue in 2019 exceeded $1 billion. 

Although operating a food truck business is more affordable than renting an established restaurant, the costs associated with such small businesses are still high. And obtaining traditional small business loans is a challenge for food truck owners

Fortunately, there is a solution. Food truck owners who want to have working capital and reliable cash flow may be eligible for a food truck bank loan

Food truck loans can give you the funds you need to cover your startup costs, inventory and help you invest in marketing to attract more customers. 

Financing Options

When considering your food truck, you have several options as a business owner. But there are differences in the borrower’s requirements, the amount you can get, and the cost of the loan. 

Therefore, it is wise to compare different loan options; you may find that obtaining a line of credit through an online lender is ultimately more cost-effective than traditional commercial loans or even crowdfunding.

Equipment Financing

If you are an entrepreneur looking for a working capital loan to purchase equipment, such as a fryer or oven, you may want to consider equipment financing. These business term loans use the food truck equipment you purchased as collateral for the loan

If you default, the lender may sell your collateral to pay off the remaining balance. In addition, if you want to finance the food truck itself, consider a commercial vehicle loan. 

Since both equipment financing and commercial vehicle loans use your purchased equipment or food truck as collateral, the interest rate on these loans may be lower than some other options listed here. 

You may also consider leasing a food truck or equipment. This may allow you to pay a lower monthly fee, but you will not use the equipment as an asset that can sell at the end of the lease. 

SBA Microloan

The SBA (Small Business Association) Microloan program provides borrowers with loans up to $50,000 to purchase inventory, supplies, or equipment as working capital. 

You do not apply for this small loan directly through the SBA. Instead, you need to apply through a small loan intermediary. The average Microloan is $13,000. 

Most banks are unwilling to lend such a small amount, so if you need less than $50,000 in food truck financing, this may be a good choice. Generally, you need to provide collateral and personal guarantees for SBA loans

Business Credit Card

Although not always the most affordable form of financing, you should not ignore commercial credit cards. If you have a sudden emergency, but you don’t have the cash to pay for it, having a credit card can relieve the pressure of not knowing how to buy. 

The key is to be able to pay off your balance in full before these astronomical rates begin. It’s worth noting that many business credit cards offer 0% APR as an introductory offer. 

Furthermore, some have reward programs that allow you to earn points, which you can redeem for cash back or travel expenses. So if these types of perks appeal to you, a credit card can bring you a financial return. 

Business Line of Credit

Another option for food truck funding is credit lines. Unlike a loan, you receive a lump-sum payment, and you will repay the loan within the loan term. You can withdraw the funds from the credit line when needed and then repay the portion. 

Suppose you have secured the approval for a credit line of $100,000. Maybe now, you need $5,000 to buy a new dishwasher. You borrow money and start paying back the money. Then within six months, you need an additional $17,000 for various expenses

Your lender will convert these two withdrawals of your credit into monthly payments. The credit limit will vary, but you can usually borrow between $10,000 and $1 million. 

Crowdfunding

Yet another financing option that you may want to consider is crowdfunding. Using websites like Kickstarter and GoFundMe, for example, you can petition to raise the capital you need.

And you can do so from both investors and average consumers who want to support you in your endeavors.

There are several types of crowdfunding to think about. Some make you pay back the money you get for funding your venture. But others only necessitate that you honor your donors with a reward of some kind.

Most crowdfunding platforms require you to pay a fee to use them. What’s more, you’ll likely pay a fee for any transactions to and from a credit card or PayPal account. 

Don’t worry, though. These fees are usually reasonable and won’t set you back too much. In the grand scheme of things, it’s a drop in the ocean compared to what you could net from donors.

Qualifying for Financing

Each lender considers slightly different criteria to meet your eligibility for food truck financing, but there are some general guidelines. 

A common one is that you need to be in business for at least six months and have a monthly income of $10,000 or more (or an annual income of $100,000). 

You may need to provide cash or collateral for the down payment, especially if your credit score is below the minimum requirement (more on that in a moment). 

You may also need a trustworthy client. If you are considering a food truck equipment loan, you will need similar qualifications, and if you have good credit, you may be required to make a 5% to 20% down payment. 

Please note that the lender may require UCC filing, which may affect your ability to obtain other financing qualifications, or may harm your commercial credit report.

Credit Score

While it’s true that credit score requirements vary from lender to lender, you usually need at least a personal credit score that’s between 550 and 640. 

If your credit score is higher, your costs will be lower to finance your food truck. In addition, the higher your credit score, the lower the down payment you may need to pay for the loan.

Financing Terms and Rates

The interest rate and terms provided by the lender depending on your qualifications and credit status and the type of financing you choose. You can borrow up to millions of dollars for equipment loans, with a repayment period of 1 to 6 years. 

The annual percentage rate starts at around 3%. SBA small loans provide loans of up to $50,000, with interest rates ranging from 0% (for those with first-class credit) to 13%, and the loan term is up to 6 years. 

Crowdfunding usually has no upper limit on the amount you can raise, but please note that you will pay the crowdfunding platform (up to 5%) and credit card or PayPal processing fees (3% to 5%). 

If you do not fully raise the target amount you set, you may not get any funds. Using the food truck line of credit, you can borrow up to $250,000, with interest rates starting at around 5%. 

Use a credit card and look for an introductory 0% APR. If not, these interest rates can climb to an average of between 13% and 20%. If you only pay the minimum monthly payment, the overall cost of credit card financing can be quite high.

Food Truck Financing and Bad Credit

Bad credit doesn’t necessarily mean you can’t get financing. Remember that different financing options have different weights on criteria, such as your business or personal credit score.

So if your score is not high, it’s best to look around until you find an option that meets the conditions and has the right interest rate

If you are looking for a commercial vehicle loan or equipment financing, the lender may accept a lower credit score because you will use the vehicle or equipment as collateral. And if you cannot repay the loan, this reduces the bank’s risk of getting into trouble. 

However, be aware that if you do not have good credit, the cost of a food truck loan may be higher. If you can postpone the loan and take the time to build credit, then you will qualify for better terms and save a little money in the long run.

In Closing

Need a hand securing financing for your small business venture? Contact the loan experts at Seek Capital to get the best loan option for your needs. 

If you’d like even more support for running a business, you will find a wealth of resources in our blogs section.  

 

Sources:

Loans | Small Business Administration

#1 Fundraising Platform for Crowdfunding | GoFundMe

Uniform Commercial Code (UCC) | Inbiz.in.gov

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