If you’re planning to start a new mobile business like a food truck or food trailer, you might be asking yourself “How am I going to afford this?”
Luckily, there are a wide variety of loans out there. Even if you have bad credit or no credit, there are still ways to get a loan for your new food truck, food trailer or cart.
Conventional Loans for Food Trucks
There’s a classic saying that goes “It takes money to make money”. This can be especially true when applying for loans from conventional for-profit lenders like banks.
Conventional lenders are looking for the safest investment possible – someone who has a proven track record of being able to repay their debts. That’s why their lending requirements often include:
- Financial documents proving that you’ve been in business for more than one year
- 620+ credit score
- Cash down payment
If you can qualify for this type of loan – great! They often offer long repayment terms and fast funding. But if your credit isn’t strong and you’re willing to be patient, you might find that an SBA loan offers better rates.
SBA-Backed Loans for Food Trucks
The Small Business Association (SBA) is a great resource for people or businesses that don’t qualify for conventional loans. Here’s how it works: the SBA guarantees specific types of loans made by private lenders in their network. This reduces risk for lenders, allowing them to offer low down payments, long repayment periods, and no collateral for some loans.
The most common SBA-backed loan is the 7(a) general small business loan. These popular loans can fund starting a new business, or to acquire, operate or expand an existing business. And you can used it for anything business related including equipment, working capital, and debt financing.
The SBA offers other types of loans too including microloans up to $50,000.
While the SBA is a great resource for everyone, there are also many mission-driven lenders. These lenders are often nonprofits focused on economic development in specific communities.
Community Development Financial Institution (CDFI) Loans for Food Trucks
The Community Development Financial Institutions Fund (CDFI Fund) supports economically disadvantaged communities by lending to new businesses. They certify and give money to a range of mission-driven lenders who focus on helping underserved groups prosper.
If you are a woman, person of color, recent immigrant, or legal alien, you may want to consider a CDFI lender. You can use the Fund’s interactive search tool to find these lenders near you.
Since these lenders are partially funded by the government, they charge lower fees and have fewer requirements. Also, many CDFI lenders go beyond loans boost your chance at success. You can also find business consulting, training, coaching, and translation services.
CDFI Business Loans for Women and People of Color
Raising capital is always tough, but it’s especially hard if you belong to an underserved community. Due to unjust lending practices like redlining and denying credit to single women, loans have historically favored white men. Things are changing, but women and people of color are still under-represented when it comes to entrepreneurship rates within the U.S.
The good news is that mission-driven lenders are helping to close the wealth gap through economic development. What does economic development actually mean? It means that you could be the next person to benefit from a CDFI business loan.
CDFI Business Loans for Recent Immigrants and Legal Aliens
Did you know that immigrants are twice as likely to start a business as US born citizens?
Immigrants are powerhouses of the small business community, but data shows that these businesses tend to stay small. On average, immigrant-owned businesses don’t hire as many employees or bring in as much money as non-immigrant competitors.
There are likely complex cultural and economic reasons why immigrant businesses stay smaller. But, it’s important to know that recent immigrants can and do get loans.
And you don’t have to be a US citizen to qualify for a loan. If you are a legal alien who is living in the United States and legally allowed to work, you can 100% get a loan!
Home Equity Loans for Food Trucks
Home equity loans can be a great alternative to conventional business loans.
If you’ve owned your own home for a while, you may be surprised at how much equity you have built up. Increasing home values has created untapped wealth for many homeowners across the country.
There are a few ways to pull start-up capital for a food truck business out of your home.
Cash Out Home Refinance
A cash-out refinance lets you take out a new mortgage on your home for more than what you owed before and the difference is paid to you in cash.
While it makes sense that this would increase your monthly mortgage bill, it’s possible that it won’t… If your current home mortgage has a higher interest rate than the rate you can get now, you might be able to take cash out without any increase in your monthly mortgage.
The average home value in the United States is now around $500,000. Because the loan amount on a home is so large, even a very small interest rate reduction can add up. An interest rate reduction can equate to hundreds, or even thousands of dollars saved every month. This might actually offset the monthly cost of the lump sum cash you’re taking out.
Also, home refinance fixed interest rates are up to 4 times lower and repayment timelines up to 10 times longer than a conventional loan. This means that a cash out refinance might equate to a much lower monthly payment than even the most competitive small business loans. Low monthly payments can be a huge boon during the first year of a new business when you might spend more than you make. And if your business is making more than expected, great! You can always make extra payments to save on interest.
If you need to borrow money for your food truck business and own a home, think about a cash-out home refinance. It might be a very cost-effective way to fund your dream.
Home Equity Line of Credit (HELOC)
Similar to a cash out refinance, a home equity line of credit also allows you to take out equity in the form of cash. However, where a refinance is a one time amount, A HELOC is a revolving credit line that works like a credit card.
The maximum line of credit a lender offers will be based on the amount of equity you have in your home. You can typically borrow up to 85% of the value of your home, less the amount you still owe on it. That means if you still owe $300,000 on your $500,000 home, you may be able to get a home equity line of credit up to $125,000.
There are a few benefits of a HELOC compared to home refinance or other business loans.
- Like a credit card, you can withdraw, pay off and withdraw again up to your credit line for a certain amount of time called the “draw period” (usually 10 years). During the draw period, you can withdraw as little or as much as you need, whenever you need it.
- You don’t have to start repaying the amount you owe right away. Instead, you only need to make low payments on the amount you’ve borrowed.
- If your company does well, you can pay off some or all of the amount you owe early and borrow more up to your credit limit.
- If you still owe money at the end of your draw period, that balance will carry into a repayment period (usually 20 years).
- While all HELOC interest rates start out as a variable rate that fluctuates based on economic conditions, some lenders will allow you to convert the variable interest rate to a fixed interest rate. This is a great move if interest rates are on the rise.
- Some lenders offer a bonus for borrowing a certain amount of money when you open your HELOC.
If you’re planning to withdraw a big lump sum up front to start your business, a HELOC may not be cheaper compared to a cash out refinance.
But, if you’re a new business trying to pay for operating costs, it may be easier to get a HELOC with a $100,000 limit than a business credit card with a $10,000 limit. This extra cushion can help you weather unforeseen challenges like a slow sales month, price hikes on expenses, or repairs to your food truck.
Even if you can’t repay the amount you’ve borrowed right away, you have peace of mind knowing that the interest compounding on your HELOC will be way lower than if you put the same debt on a credit card.
Crowdfunding a Food Truck
Crowdfunding is where a ton of investors give small amounts of money to help you achieve a goal. Unlike institutional lenders, crowdfunding investors are often regular people who want to see your food truck succeed.
Using a website like Kickstarter or Indiegogo are the most common ways to crowdfund.
Crowdfund financing is most effective for a food truck if you:
- Have a cult following already
- Leverage your existing social media networks
- Show a proof of concept that persuades people you’re worth investing in
- Create an engaging video that clearly communicates what you will do with the money
- Offer rewards to investors that are appropriate for the amount they invest
- Set a reasonable funding goal (you want to hit 100% so funds are not returned to investors)
- Create tantalizing stretch goals that reward investors with bonus benefits if you hit them
- Show others that you’re serious by getting a couple of big investors to invest in your campaign first
Consider offering a reward structure like: stickers for a $5 investment, one free meal for $25, 5 free meals for $150, or a 100 person catering for a $2500. This business to consumer (b2c) lending model can be extremely effective as it also works as marketing. When your business launches, you’ll have excited, built-in customers who are incentivized to see you succeed.
Another option is to crowdfund your mobile food business using angel investors who want equity in your company. Wefunder, Crowdstreet, and SeedInvest are some popular platforms for equity-based investment.
A major benefit to equity based crowdfunding is being able to raise a large amount of cash fast. Sounds great right? But, there are some things to keep in mind. These investors will expect to see continued growth and dividends from your company – it’s not a one-time reward, it’s a commitment.
Food Truck Financing: The Bottom Line
Getting financing for your new food truck business may be easier than you think.
It seems crazy, but more than 80% of entrepreneurs never seek financing! The vast majority of people use their personal savings or borrow from family or friends instead of getting loans.
While starting a new business can feel overwhelming, don’t skip the financing step. A lack of financing can make it harder to grow your business when the economy is booming and weather downturns when it’s not. No matter how you choose to borrow, getting financed will give you a competitive edge without draining your personal and social capital.
Reach out to lenders in the links above or research your own. Once you have an idea of how to pay for your new food truck, food trailer or mobile business, contact Firefly Fabrication at (323) 524-0078. We’ll provide a quote and introduce you to nonprofit CDFI lenders or a broker specializing in conventional food truck loans.