Food Truck Financing: What Are the Options Available?

Ezra Cabrera | January 18, 2022


    Key Takeaways

    • Food truck businesses can be an excellent alternative for individual entrepreneurs looking to break into the food business but don’t want to commit to a full-pledge restaurant business. It’s also less costly and easier to manage.
    • Food truck financing options have become more accessible for businesses looking to start or expand their food truck businesses. Some of the financing options they can apply for include business term loans, business lines of credit, business credit cards, equipment financing, and SBA microloans.
    • Business owners turned down for food truck loans can also consider equity-based financing options like private investors and crowdsourcing campaigns.

    Best Food Truck Financing Solutions

    From the startup costs to your ongoing expenses, you need a significant amount of working capital to keep the business going. Below, we’ve outlined the best food truck financing solutions and how they work.

    1. Business Term Loan

    Funding amount: $5,000 to $5 Million

    All businesses are eligible for a term loan – even food trucks. With a business term loan, food truck business owners receive a lump sum of money that they can repay in fixed amounts within a specific period or term.

    Term loans are typically classified into three categories based on the length of the repayment period:

    • Short-term loans have a repayment period of three to 12 months. It also comes with a lower funding amount, making it a suitable financing solution for addressing short-term business needs. It could be bridging seasonal cash flow gaps, buying food truck supplies and ingredients, and paying staff, among others.
    • Medium-term loans, also known as intermediate-term loans, have a repayment period of three to five years. Intermediate-term loans are best used for refinancing existing debts, buying more expensive equipment, or product expansion.
    • Long-term loans can be repaid anywhere from five to 25 years. The most common uses for long-term loans include business expansion, such as acquiring another food truck or investing in a brick-and-mortar store.

    The best medium- and long-term loans are usually those that banks offer. But it comes with a particular downside: You need to be creditworthy to qualify. That means your credit score must be at least 680 or better, your business must be operating for two years, and you must demonstrate solid business financials. Along with their high standards, you’d also have to submit a mountain load of documents to prove your eligibility.

    Alternative lenders also offer intermediate- and long-term loans. The advantage of alternative lenders is that they require fewer documents than banks. Plus, they’re known for their fast approval process, making it a perfect choice if you’re looking to get your hands on some extra capital ASAP. However, their term loan products may come with higher rates and fees, especially if you have a poor credit standing and financial background.

    2. Business Line of Credit

    Funding amount: $10,000 to $5 Million

    Business lines of credit are among the most flexible financing solutions available for businesses. With one, you can address almost any business need – be it equipment purchase, renovations, product expansion, buying ingredients and other supplies, and more.

    With a business line of credit, the lender opens a credit line that you can access whenever needed – given that they don’t exceed the pre-established credit limit. Unlike a term loan, you are not obliged to use the entire amount in one go. Instead, with a line of credit, you can disburse the amount you need and only repay that portion (plus fees).

    One of the biggest advantages of lines of credit is that it’s a revolving credit. This means that the amount of available credit goes up each time you make repayments. If you need a working capital boost again, you can access the same set of funds to address any business need.

    With standby capital available, you can address any business need without worrying about putting a strain on your finances. Whether it’s to replace broken equipment or buy tables for your food truck, you can have access to the amount you need anytime.

    3. Business Credit Card

    Funding amount: Minimum credit limit starts at $500

    Business credit cards give you on-the-go funding. You can use the card to purchase everyday business needs, such as buying ingredients, coffee for the team, fuel for the truck, or repairing/replacing any broken part(s) of your food truck.

    Unlike other types of financing, business credit cards come with lower credit limits. Once approved, the minimum credit limit could be as low as $500. However, as you build your credit and the financing company sees that you’re diligently making payments, they will eventually offer to increase your credit limit. Some business credit cards can have a credit limit of up to $50,000, but again, this will depend on the borrower’s creditworthiness.

    Many credit card providers may offer 0% introductory APR within a specified period – usually one year. This means you can carry a month-to-month balance without accumulating any interest and fees for one year (or depending on the provider’s offer).

    Credit card providers also offer rewards programs that let you earn points, travel miles, or cashback every time you use the card for purchases.

    Having a business credit card can be great supplemental financing, even if you have other forms of food truck financing under your business. It can be convenient if you find yourself face to face with an emergency expense.

    4. Equipment Financing

    Funding amount: 80% to 100% of the equipment’s value 

    As you’ll be running a food truck business, one of the financing options you should look into is equipment financing. Especially if you’re a startup, equipment financing can help you get the truck you need to run your business. Other than a truck, it can also help you fund other purchases like ovens, grillers, refrigerators, food storage, stoves, and more.

    Eligible businesses can have anywhere between 80% to 100% of the equipment’s costs funded through equipment financing. The repayment term usually lasts up to the equipment’s estimated life expectancy. For instance, food trucks can have a repayment term of five years, while other food truck equipment can have a two to three-year repayment period. The interest rates for equipment financing can hover anywhere between 8% to 30% depending on the lender and your creditworthiness.

    Moreover, you won’t have to worry about pledging another personal asset to act as collateral for the loan. The loan will be self-securing, which means that the equipment funded will serve as the collateral itself. That means if you default on the equipment loan, the lenders will repossess the equipment you bought with the proceeds and use that as payment for your remaining loan balance.

    5. SBA Microloan

    Funding amount: $5,000 to $50,000

    The SBA microloan is a business financing option provided by the government through community-based non-profit lenders. As the name implies, microloans come with a lower funding amount than a conventional business loan. Once approved, businesses can get up to $50,000 in funding.

    SBA microloans are specifically designed to help underserved businesses like startups and those owned by women, veterans, and minorities, get easy access to funding. These groups of people usually have a hard time qualifying for loans because of their risky nature. With that, if you’re still starting out on your food truck business, this is a great loan option to consider.

    When it comes to the repayment structure for SBA microloans, the SBA only has one rule: the length of repayment must not exceed the maximum term limit of 6 years. The rates can be between 6.5% to 13% (with an average rate of 7.5% in 2019), which is significantly lower than other types of financing.

    However, it’s worth noting that since the federal government provides the loan, the application process can be lengthier than a typical business loan from alternative lenders. If you’re in a cash crunch and you need immediate access to cash, this might not be the best loan option right now.

    Alternative Funding Options: Crowdsourcing Campaigns and Private Investors

    Aside from the financing options mentioned above, you might also want to consider equity-based financing. Basically, you’ll have to sell a portion of your business to investors in exchange for funding with this type of financing. That means you will have to give up partial control of your company.

    Two of the most popular type of equity-based financing are crowdsourcing and private investors.

    Private Investors

    If you can’t qualify for the food truck financing options mentioned above, turning to private investors could be worth trying.

    A private investor could be a family member, friend, or an established business owner looking to invest in newer businesses (angel investor). They can provide you the funds you need to keep your food truck operations running smoothly, granted that you ace your pitch and convince them that your business will be profitable.

    Private investors may loan you the money and let you pay the debt back overtime. But others may want a portion of your business, especially if they see that your small business is growing rapidly. Before moving forward, be sure that you know the terms of the deal. This way, you can avoid problems in the future.

    Crowdsourcing Campaigns

    Crowdsourcing is a funding option where a business starts a campaign online to get strangers to invest in their business. In exchange for their money, they can either offer free products or offer equity. Food trucks could go with the former considering their size and nature.

    Business owners can head to crowdsourcing websites like Kickstarter and IndieGoGo to jumpstart their campaigns. These websites are packed with willing investors looking to invest in businesses with great potential.

    One advantage of crowdsourcing is that it doesn’t require businesses to demonstrate a solid financial and credit background, making it an excellent alternative to food truck loans.

    For crowdsourcing to succeed, you have to invest a lot of time and effort for your campaign to succeed. For example, you may have to develop a compelling description of your food truck that will get people interested in investing in your business.

    Furthermore, some crowdsourcing websites may require you to reach a specific goal before you can withdraw the funding. If you don’t reach that goal, the funding won’t go through. So, you’d have to go the extra mile in convincing potential investors to fund your business.

    Food Truck Financing FAQs

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

    The exact amount will vary depending on several factors like the type of food you’ll serve, licenses, permits, fees, and location, among others.

    In general, it costs around $70,000 to $80,000 to get a food truck up and running. The price is inclusive of a “gently” used truck, remodels, and kitchen equipment. But remember, the calculation still doesn’t include the day-to-day operating costs. With that, the overall costs could likely go up to six figures.

    2. What documents do I need to apply for food truck financing?

    Each lender will handle loan applications differently. In other words, they may require businesses to submit a different set of documents when applying. But they do ask the essential documents to be submitted in the early stages of application.

    You can expect the lenders to ask for the following documents as you apply for business financing:

    • Driver’s license
    • Business financial statements
    • Personal and business credit report
    • Personal and business bank statements
    • Business registration and licenses
    • Tax returns

    To be sure, give the lenders a call and ask what additional documents you have to prepare.

    Grow Your Food Truck with Food Truck Loans!

    Although they’re less costly than running a brick-and-mortar restaurant, you still need a significant amount of working capital to get your food truck business off the ground. That’s why there are a lot of food truck financing options available.

    Choosing the best loan option for your food truck business doesn’t have to be daunting. By carefully evaluating your needs and researching each possible loan product, you’ll eventually figure out which financing best suits your needs. From there, you can take on any business opportunity and see your food truck business reach greater heights.

    About the Author

    Ezra Neiel Cabrera has a bachelor’s degree in Business Administration with a major in Entrepreneurial Marketing. Over the last 3 years, she has been writing business-centric articles to help small business owners grow and expand. Ezra mainly writes for SMB Compass, but you can find some of her work in All Business, Small Biz Daily, LaunchHouse, Marketing2Business, and Clutch, among others. When she’s not writing, you’ll find her in bed eating cookies and binge-watching Netflix.