Food truck loans are a blanket term for several types of loans that are used specifically to start a food truck or help grow its business. Food trucks, which are effectively kitchens on wheels, are subject to many of the same regulations, expenses, and startup costs as a restaurant, with the added difficulties that come with having a commercial space on wheels. But food truck owners find themselves in a vibrant and growing industry. According to industry research firm IBISworld, the food truck industry has experienced year-over-year growth every year data is available, save for 2019 into 2020, due to the COVID-19 pandemic. They also report that the food truck industry generates well over a billion dollars annually.
If you’re debating on building, buying, or starting a restaurant or food truck, food trucks can be an excellent option. They have several advantages over opening a full-on restaurant. The first may be the most obvious: mobility. If you open a restaurant and find that the area’s foot traffic leads to low sales, it may be difficult to get customers back inside. If you’re running a food truck, you can simply go where the people are. In addition, food trucks are considerably less expensive than a restaurant. They’re smaller, don’t require any seating, and have a smaller staff by a considerable margin. Finally, they’re able to be very focused. You don’t need a menu like a national chain restaurant. Instead, many food trucks are focused on single products and churning them out quickly.
Why You Need a Food Truck Loan
Once you’ve decided to enter the food truck business, it becomes very obvious that you’re going to need business loans to help finance your truck. Before you run to pop in an application, though, you need to really think over your business plan. What products are you going to offer? Your menu will dictate the size of your truck, the necessary equipment, and literally every other part of your truck. And consider all of the expenses that are likely part of running a successful food truck:
Buying new truck
First and foremost is buying a new food truck. You’re not going to be running a mobile restaurant out of a tiny sedan. You’re going to need to purchase or lease a large vehicle capable of fitting an industrial kitchen.
You’ve got three options when it comes to buying the truck. Least expensively, you can buy a used food truck. Depending on what the previous owners made in their truck and what you’re planning to cook up in yours, this option could have a low up-front cost with considerable need for remodeling and renovation. Secondly, you could buy a used truck and build a brand new kitchen. You’ll save money by buying a truck with miles on it, but you won’t face the considerable remodeling expenses. Finally, and most expensively (but most easily customizable), you can buy a new truck and build a new kitchen into it.
Regardless of what’s used and what’s new, buying the food truck itself is almost certainly going to be the largest expense in your new business and should take up the largest portion of your consideration as you consider your financing options.
Next, you’re going to need a kitchen. The exact costs and necessary equipment will depend entirely on what products you’re planning to make in your truck. A taco truck doesn’t need an espresso machine, and a peanut-butter-and-jelly truck (it’s a thing!) doesn’t need a flat top grill. This is where your business plan is absolutely vital. You need to have a firm grasp of your menu in order to make sure that your truck is set up with the perfect kitchen.
The Paperwork: Licensing, Permits, and Insurance
Depending on your particular locality, you’re going to need permits, inspections, licensing, and insurance. In addition to the general liability insurance every business should have, you’re going to need to have commercial vehicle insurance, and more. On top of that, you’re operating a kitchen. That means health inspections and regular permit renewals. Are you going to offer alcoholic beverages? You may need a liquor license. These expenses really add up, and will depend on your menu, your state and city, and your truck.
Depending on your menu, the size of your truck, the complexity of your foodstuffs, and whether you’re operating a single truck or more than one, you may need to hire additional staff to drive, cook, or operate your point of service system.
Finally, you’re going to need to get word out about your fantastic new truck. That can be expensive. Are you going to have advertising on paper? A dedicated social media presence? Are you going to go to food truck festivals?
Forms of Food Truck Financing
As you can see, opening a food truck, while less expensive up front than many other types of small business, you’re likely still going to need loans. Once you know everything your company needs, you should consider all of the different loan options available to business owners and decide which are going to be most appropriate for your specific situation.
A traditional bank loan is exactly what you think of when you think about a small business loan. A lender will examine the potential borrower’s creditworthiness by examining their credit history, their annual income, and other factors. Then the lender will disperse a particular loan amount which is repaid by the borrower with interest. The size of these monthly payments depends on the loan’s interest rate, the size of the loan, the length of repayment terms, and whether it’s a fixed or variable rate loan. Helpfully, these loans, also called term loans, are extremely flexible: you can use them to hire staff, buy a truck, stock up on ingredients, supplement cash flow, and nearly anything else.
With all food truck financing options, remember that applying for a loan is basically asking a financial institution to bet on your ability to repay a loan. If the lender is confident you’ll be able to repay (you have good credit, high annual revenue, excellent bookkeeping and accounting, and a strong business plan), you’re going to have more favorable terms. If your credit is less than ideal, you may experience higher interest and smaller loans as the lender isn’t willing to go out on a limb.
SBA Loans (Particularly Microloans)
SBA loans are guaranteed by the United States Small Business Administration, or SBA. That means that they’re able to operate much like a traditional loan, except that there’s significantly less risk for the lender: if the borrower is somehow unable to repay the loan, the lender will make up a considerable portion of the loan through the federal government.
That guarantee is key to these loans, and is both helpful and harmful for potential borrowers. The guarantee from the government means that these loans are very difficult to qualify for: the government doesn’t necessarily want to give out hard-earned taxpayer dollars willy-nilly. But if you’re able to qualify for one, SBA loans are likely to have lower interest rates and longer repayment terms than a traditional loan. These loans also will have more complicated loan applications and take a long time.
There are two main forms of SBA loans that food truck owners should be aware of. First, there are SBA 7(a) loans. The most common form of SBA loans, a 7(a) loan can be for up to $5 million and have a repayment term of 10 years or 25 years, depending on the purpose of the loan. They’re also variable rate loans, which means that your interest rate will change depending on your creditworthiness and the current prime interest rate.
There are also SBA 504 loans, which are fixed-rate loans of up to $5 million. The big difference is that 504 loans must be used to finance assets that are intended to grow business or create jobs. 7(a) loans can be used to purchase inventory or as working capital loans; 504 loans must be used for things like landscaping, building new facilities, or modernizing roads and typically have longer repayment terms.
Finally, the SBA offers a microloan program. They offer funds and act as an intermediary with local groups that offer loans of up to $50,000. Microloans tend to have shorter repayment terms than other forms of SBA lending, but given the lower up-front costs associated with the food truck industry, SBA microloans can be an excellent option.
Business Credit Cards
Business credit cards operate precisely like a personal credit card, but for your company instead of for an individual. Depending on your credit score, income, and other factors, a bank will issue you a card with a credit limit. You make purchases for your food truck and pay interest based on your purchases. Even the best food trucks can sometimes run out of ingredients, need a quick vehicle repair, or have other small unexpected costs pop up. A business credit card can help make sure you’ve always got a solution. In addition, business credit cards often feature rewards, just like personal credit cards. So if you’ve got a regular expense (gas?), you can make that purchase with a business credit card, pay that card’s balance off every month, and you’ll be building credit and earning rewards on an expense you’ll have every single month.
Equipment loans are meant specifically to help finance business equipment, as their name implies. And the food truck industry is highly equipment-dependent: there are POS systems, kitchen equipment, and, notably, the truck itself. Food truck equipment can be highly specialized and very expensive.
Equipment financing works like this. You’ll make a down payment on the equipment, and a financial institution will give you a loan for the remainder of the cost of the equipment. Then the financial institution will hold the newly-purchased equipment as collateral. That means that if the borrower is for some reason unable to repay the loan, the lender can simply repossess and sell the new equipment, leading to reduced risk on their end.
These loans don’t bring the same freedom to operate as a traditional or SBA loan, but holding the equipment as collateral means that interest tends to stay relatively low. And in an industry where the business facility itself is a piece of equipment, these loans are even more advantageous.
Lines of Credit
Business lines of credit work a lot like a business credit card, though often on a larger scale. A borrower goes to a financial institution and receives approval for a particular credit limit. The business will only make payments on money they’ve spent under that limit. Lines of credit are helpful at those times where unexpected expenses pop up. If you’re operating a coffee truck and your espresso machine gives out, you won’t be making any money. A line of credit means you’d be able to replace it quickly and get back up and running.
Are you an existing restaurant with an established customer base? Many food trucks are born from an existing restaurant, and financed through crowdfunding. Your loyal customers might be willing to help finance a food truck in order to get your well-loved products on the road. Entrepreneurs will often offer benefits in exchange for crowdfunding – give $10 to the crowdfunding effort, receive coupons for 20% – and generate enough money to get a new truck.
Finally, there are cash advances. They’re not loans – instead, a lender will purchase a portion of future credit card sales. Instead of using interest rates, cash advances operate with what’s called a factor rate, often a number between 1 and 2. For example, you might get a merchant cash advance for $10,000 at a factor rate of 1.2. You’ll repay the size of the advance multiplied by the factor rate, or $12,000 in this example. Payments are made on a daily basis, based on a percentage of each credit card transaction.
Cash advances are helpful because the payments vary with your transactions. If you’re in a slow period, you will make smaller payments. But the opposite is also true: when your company is doing its best, you’ll be making relatively large payments. Cash advances are also available for entrepreneurs with bad credit, and are a relatively fast type of financing, but are often one of the most expensive ways to get cash quickly.
Which Type of Loan is Best? It Depends!
Now that you know all of the different types of loans and all the ways you’ll need that money in the food truck industry, think about yourself, the company, and your needs. How’s your credit? What’re you using the money for? How quickly do you need it (an SBA loan can take weeks; cash advances can take hours)? Are you starting up a new food truck or branching off from your existing restaurant?
Once you’ve got a clear-eyed idea of what your needs and desires are, you’ll be able to have a good idea of what loan you need, how big it needs to be, and exactly how you’re going to spend it to build a flourishing food truck company in an exciting and growing industry.