8 Ways to Fund a Food Truck Business

8 Ways To Fund A Food Truck Business

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You just stood in in a food truck line for fifteen minutes to get an $9 taco, and you’re not impressed. You think you can make tacos much better, faster, and cheaper— and now you’re daydreaming about making it big in the food truck biz. Stick around and I’ll tell you what you need to know to cook up a plan! 

8 ways to fund a food truck business are equipment loans, SBA7(a) loans, SBA microloans, bank term loans, business lines of credit, business credit cards, merchant cash advance, crowdfunding and family loans.

Before you start thinking about how to get food truck funding, think about exactly what you need and how much it will cost. One mistake food truck owners make is spending too much on non-essentials, and then not having enough money left over for the mundane but necessary expenses, like taxes, insurance, permits, licenses, workers and fuel (the average food truck gets 7 miles per gallon). To increase your likelihood of success, draw up a thorough business plan and stick with the budget.

Commercial Vehicle Loans and Equipment Loans 

Good for financing food truck vehicle and cooking equipment

8 Ways to Fund a Food Truck Business

If you’re seeking funding to purchase the food truck itself, look into a commercial vehicle loan. A brand new food truck costs a whole lot of money, and a used one will seem cheap by comparison but will be extremely costly to repair and maintain—either way, it will be your biggest expense starting out.

Banks that cater to small businesses such as Chase and Wells Fargo typically offer commercial vehicle and equipment loans.  You should have a good credit score and money for a down payment, around 5%-20% of the cost of the truck, according to Jeff Gitlen of LendEdu.

The loan is secured by whatever equipment you purchase, though, so if you default on the loan, they can come and take it back. Because the equipment is the collateral, you will get a decent interest rate, from around 6%-9% if your credit is good, and higher if your credit is less than good (up to 30%). Different lenders have different applicant requirements, but you’ll get an idea of what lender will best suit your situation with Matthew Sexton’s lender breakdown at Fit Small Business.

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Bank Term Loans

Best rates and terms, not easy to get

A bank should be the first place you should consider going for your loan.  Banks generally offer the best interest rates and borrowing terms of all potential lenders.

However, food trucks are still considered risky by traditional lending institutions like banks and obtaining a bank loan can be a long process. If your business is long-established and creditworthy, you’ll have a much better shot at getting a bank loan that a new food truck business would.

The interest rates on bank loans are 4%-10%, with 1-5 year-terms.

Business Lines of Credit

Flexibility, wider variety of financing

Business lines of credit are good for more minor cashflow gaps and for financing ongoing projects. Terms vary by lender, but they offer lower rates than credit cards. 

According to Meredith Wood of Fundera, “A business line of credit will allow you access to a pool of funds from which you’ll be able to draw capital as needed. When you repay your business line of credit, you’ll only owe for the amount you end up spending—which means you’ll only pay interest on what you end up spending… Additionally, after you repay what you’ve spent, you’ll be able to draw on your line of credit, again and again, each time you need to access financing.”

Business Credit Cards

Fund everyday purchases such as supplies and fuel

Business credit cards won’t have very high credit limits, but the good news is that you can get one with average credit, you can start building your business credit history, and you can start earning rewards points.

Another great thing about business credit cards is that you can easily apply for them online. 

Try to get a business credit card with a 0% 12-month introductory APR.  Once the introductory period ends, any unpaid balance that carries over into the next cycle will incur interest at a much higher rate than a small business loan.

SBA Loans 

Government-guaranteed, extensive requirements

SBA loans are small to large loans for businesses that have exhausted other options. These loans have long terms and low interest rates. However, they also have stringent requirements, and the loan application process can take several months.

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SBA 7(a) Loan

Working capital and debt consolidation

8 Ways to Fund a Food Truck Business

SBA 7(a) loans are good for financing working capital and debt consolidation. 

Working capital is calculated by subtracting your liabilities from your assets.

If the sum is a negative value, that indicates you need more working capital. 

A debt consolidation loan will refinance your current business loans, including high-interest loans, merchant cash advances, payment loans, and short-term business loans, giving you a more affordable interest rate overall.

To qualify to apply for an SBA 7(a) loan, you must be a US citizen or lawful permanent resident, and your business must have a good credit history—in general, you should have a good credit score–650 or higher with no liens, settlements, or charge offs.  You must not have any bankruptcies or foreclosures within the past three years.

SBA 7(a) loans can be for up to $5 million dollars with a 10- or 25-year repayment term. The interest rate will vary according to your credit worthiness and loan size, but it is typically the base rate plus 2.25%-4.75%. There are no prepayment penalties.  

SBA Microloans

Flexible funding (except for debt repayment or real estate purchases)

If your food truck qualifies as a very small business, an SBA microloan might be the perfect fit!  SBA microloans are for amounts less than $50,000 (the average microloan amount is $13,000) and can be used for nearly any business purpose other than debt repayment or real estate purchases.  

Different lenders have different requirements for applicants, with interest rates typically between 8%-13%.

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Merchant Cash Advance

Very fast financing, insanely high interest

A merchant cash advance is not a loan, but a purchase of your sales’ future credit card receivables.  This type of financing works best for businesses that do a lot of credit card sales.  

After completing the application, your lender will give you a sum of money. A percentage of your food truck’s credit card sales will be deducted from your credit transactions to pay toward the amount your lender paid you. 

One of the drawbacks of a merchant cash advance is the potential to get burned by the objectively high APR— 70%-200%! Merchant cash advances are considered “short-term finance” and are subject to fewer regulations and interest caps than loans are.

Crowdfunding

Good in theory, but hard to pull off

Crowdfunding pools the money of multiple investors to help get your business going. Crowdfunding is usually offered one of two ways: as a loan you repay your investors with interest, or as a direct investment with equity paid to your investors.

When the crowdfunding itself is successful, it offers low risk with potentially high reward. Crowdfunding as a finance process has a low success rate, though. The campaigns are fairly low visibility, taking a long time to raise the money you need.  Further, the fees incurred from the crowdfunding platforms are very high and meeting the requirements can be grueling.

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Friends and Family Loans

Low interest: no credit check–but don’t take it with a grain of salt

8 Ways to Fund a Food Truck Business

You may be surprised to know that a little over one-fifth of small businesses have borrowed money from friends or family members. The perks of getting a home-grown loan are that you don’t need to go through a long application process, you may not need excellent credit, and your parents or pals probably won’t charge you much interest, if any.  

The most obvious drawback of borrowing from friends or family is what happens if you don’t take the loan repayment seriously. Small business experts advise borrowers to treat a friend/family loan exactly as you would bank financing—make every payment on time and give them performance and projection updates.

Remember that you are legally obligated to repay your loans from friends and family. If you stop repaying the loan, they have the right to take you to court to get their money back, potentially 86’ing your relationship. It’s very important that each party has the terms of the loan agreement in writing, so everyone knows what is expected before any lending takes place.

Grants–Takes some digging but you don’t have to pay them back

Finally, I didn’t count this as one of the official ways to fund your food truck, but let’s touch on small business grants. Grants are often not on anyone’s radar because one must do their own research to find them, but if successful, one will be rewarded with funding they aren’t required to pay back. 

There are special small business grants just for women, minorities and veterans; there are also grants issued by those in states who want to generate economic growth.  It’s worth a look to see if there’s one out there for you!

Frequently Asked Questions

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How much does it cost to start a food truck business?

Realistically, it costs around $100,000 to open a food truck. Expenses include the truck and its gas, storage and maintenance, POS system, packaging and prep supplies, credit card fees, cooking equipment, propane, permits, licensing, insurance, taxes, food inventory, wages and event participation fees. 

Should I buy a used food truck?

If you’re buying a used food truck, just keep in mind that food trucks average 7-10 years of being operational, and maintenance/breakdown costs of “old” food trucks can be astronomical.

To learn more on how to plan your own food truck business click here!

Please note that the contents of this blog are for informational and entertainment purposes only and should not be construed as legal advice. Any action taken based on the information provided in this blog is solely at your own risk. Additionally, all images used in this blog are generated under the CC0 license of Creative Commons, which means they are free to use for any purpose without attribution.