Food truck loans allow businesses to borrow needed funds for the purchase of a new or used food truck. The loan is secured by the asset being financed. Because the vehicle is a specialty vehicle and has been built to serve, store, and potentially prepare food, the cost of the vehicle will typically be higher to account for this additional equipment.
Because the value of a food truck is typically higher than that of a corresponding vehicle or trailer, and the equipment is specialized, there is additional risk for the lender. Add to this the degree of risk inherent in any business, and you’ll find that food truck financing is more difficult to obtain compared to typical vehicle financing and may come with correspondingly more restrictive guidelines. Here’s how to get food truck loans in seven steps.
1. Determine the Cost of Buying a Food Truck
Food truck costs can average between $20,000 for a bare-bones or used food truck, all the way up to $200,000 for a brand new, top-of-the-line model. The cost will vary depending on age and condition, and you may want to factor in additional expenses, such as reconditioning and equipment.
Some examples of food truck acquisition and startup costs are:
- Food truck ($20,000 to $200,000): Based on the type of vehicle, condition, and age
- Vinyl wrap ($2,500 to $5,000): This cost will vary based on quality and location
- Equipment ($0 to $25,000): This will vary based on what equipment is included in the initial food truck purchase
- Licensing ($50 to $500): Varies by locality
- Marketing and website ($0 to $5,000): Facebook and Twitter are free, and there are many free website platforms, which can help manage costs
- Point of sale system ($50 to $1,000): More and more businesses are using a mobile credit card payment system such as Square and Shopify
- Miscellaneous expenses ($2,500 to $7,500): Other expenses, such as pots and pans, uniforms, safety equipment, and initial inventory, will vary
Borrowers will need to make many considerations regarding their startup budget, outside of simply purchasing a food truck. For example, you will want to factor in the need to finance additional equipment that is not included in the vehicle as well as working capital to get your business off the ground. This may impact which lending option is most appropriate.
In addition to the cost of the food truck, you will want to factor in costs such as vinyl wrap or paint as well as additional equipment. You’ll also want to consider additional needs such as marketing, a website, and startup inventory. A point of sale system to accept payments is also an important consideration.
2. Evaluate Loan Options
Perhaps the most critical step in finding food truck financing is selecting the right loan. Some options will have the best annual percentage rate (APR) and terms while others are easier to qualify for new businesses or poor credit. Understanding which loans are available is an important first step to funding your food truck.
Food Truck Loan Options
Here’s a look at the top food truck loans.
SBA Working Capital Loan
An SBA working capital loan (also known as an SBA 7(a) loan) is a loan backed by the Small Business Administration. The actual loan is offered lending institutions and partially guaranteed by the SBA. This allows banks to hedge their risk and lend in scenarios where they otherwise wouldn’t. SBA loans are typically easier to qualify for than a commercial loan, especially for first-time business owners.
If you get an SBA loan, the rates and term you can expect for your loan are:
- Loan range: $100,000 to $5 million
- Interest rates: 7.75 to 10.25%
- Term: 5 to 25 years
An SBA loan can be a great option for a food truck, as it offers financing for the truck itself as well as other needs like inventory and working capital. SBA loans require all partners with at least 20% ownership in the business to sign for the loan. Additionally, SBA loans require that the bank collateralize the loan to its best ability, meaning banks will typically take a lien on your house.
Conventional Business Loan
A conventional business loan is a loan that is available from your bank and is available to any business, without any additional underwriting requirements from the SBA. These loans will have higher minimum qualifications and may not be available to new businesses depending on the borrower’s credit and existing assets.
Here’s a quick look at what you can expect with a conventional loan:
- Loan range: $25,000 to $250,000
- Interest rates: 6 to 30%
- Term: 1 to 5 years
Like SBA loans, conventional loans can typically be used to finance more than just the initial asset, including helping to pay for inventory, needed equipment, and working capital. Underwriting requirements will vary from bank to bank. Many banks will only lend if you already have an existing business banking relationship, making these a great option for expansion, or highly qualified borrowers.
An equipment loan is a loan that is secured by the vehicle that you’re financing. This is a common option for businesses that are expanding and adding a food truck, or for businesses that can pay cash for many expenses but would prefer to take out a loan on the equipment.
Some of the rates and terms you can expect to see for an equipment loan are:
- Loan range: $50,000 to $250,000
- Interest rates: 5 to 20%
- Term: 1 to 5 years
This is also a commonly offered “in-house” option by food truck manufacturing companies, in addition to equipment leasing. An equipment loan allows a borrower to finance a food truck and set up monthly amortized payments over time. A drawback is that equipment loans typically will not provide financing for inventory, working capital, or other expenses.
For food truck owners on the lower end of the financing spectrum, an SBA microloan might be the right option. Typical microloans are between $500 and $50,000 and can be used toward the purchase of a food truck as well as additional equipment and working capital. The SBA offers microloans through intermediary nonprofits.
The typical rates and terms for SBA microloans are:
- Loan range: $500 to $50,000
- Interest rates: 7.75 to 8.50%
- Term: Up to 6 years
An SBA microloan is a great option for startups and new business owners who need up to $50,000 and can pass the program’s minimum criteria. Microloans may be used to purchase a food truck or trailer, for additional equipment as well as for working capital. The average funding for an SBA microloan, according to the SBA, is about $13,000.
3. Determine Your Eligibility
Getting food truck loans can be difficult, so understanding the following qualifications will be critical to finding the right type of loan. While having poor credit or being a start-up business is not an automatic disqualification, it will make finding financing more difficult and ultimately more expensive.
Some of the important food truck loan eligibility requirements are:
- Credit score: 650-plus recommended
- Down payment: 5% to 20% on average
- Years in business: Two years in business recommended, start-up financing may be available
- Annual revenue: $50,000-plus for businesses with two or more years
Perhaps the most important factor in getting a food truck loan is your personal credit score. Unless you have a well-established business with its own tradelines, a personal guarantee will almost always be required. Food trucks may fall into a higher risk funding category, meaning lenders will want to see higher down payments, ranging between 5% and 20% for borrowers with strong credit, up to 50% or more for borrowers with no or poor credit.
4. Gather Documentation
Depending on the type of financing you pursue, the documentation requirements will vary. Many equipment financing and leasing companies will do application only financing up to $250,000. Traditional banks and SBA lenders will ask for more documentation, including two years of financials, profit and loss (P&L) statements, and a detailed funding allocation and business certificate and license.
Some of the documents you’ll want to have prepared are:
- Business financials: This includes a balance sheet, which is a snapshot of your business’s finances, including assets and liabilities, as well as bank statements.
- Personal financials: This may include bank statements as well as a personal financial statement, detailing your personal assets and liabilities.
- Year-to-date P&L: Also known as an income statement, this shows the lender your revenues and business expenses. Lenders will want to see a year-to-date P&L and may also ask to see the last two years.
- Business plan: Lenders may wish to see a business plan, including a detailed forecast of future revenues, and cash flow and projected profit margins. Lenders may also wish to see what sets your brand apart, as well as your mission and values.
- Business and personal tax returns: Lenders may wish to see tax returns for the last two years. If you’re behind on your filings, you will need to provide proof of extensions.
- Business license: A business license, or other business registration, will be required by many lenders. It’s a good idea to also have other business legal documents on hand, such as articles of incorporation, franchise agreements, and any lease documentation.
- Professional resume: Particularly for SBA loans, a professional resume detailing your qualifications, and emphasizing relevant experience, may be requested.
- Business debt schedule: Lenders may ask to see a list of debts owed by your business. A debt schedule lists these liabilities and includes payment amount, interest rate, and payment due dates.
One of the most time-consuming parts of applying for financing is getting all of your loan documentation together, so it is a good idea to get everything together early. A loan not funding on time can cost you a significant missed opportunity and may even kill the deal if the seller moves on.
For assistance with these requirements, you might consider working with a local resource. An attorney can help you get your business incorporated. Your local chamber of commerce may assist with local licensing requirements, and many have worked with their local chapter of SCORE on business plans, who partner with the SBA to help entrepreneurs start and grow their business.
5. Find the Right Food Truck
Once you have your documentation together for your loan, picking out the right food truck is a logical next step. You’ll need to determine if you’ll buy new or used, whether you want a food truck or food trailer, and if your food truck needs to contain a full commercial kitchen into account. You will also want to factor in any necessary retrofitting of the vehicle.
Some factors to consider when choosing a food truck to purchase are:
- Purchase type: Will you purchase a new vehicle or a used vehicle?
- Condition: If you purchase a used vehicle, what condition is the vehicle in? Will it require repair or refurbishing?
- Retrofitting: Does the vehicle come with the required equipment, or will it require retrofitting?
- Vehicle type: Options include a food truck, trailer, and cart, depending on your needs.
- License type: Although rare, some food trucks can exceed 26,001 pounds, requiring a commercial driver’s license.
Picking an older food truck might save you a lot of money upfront, but issues with deferred maintenance may cost you more in the long run. Lenders will also want a higher interest rate. On the other hand, buying the newest, shiniest food truck on the lot can saddle your business with a high monthly payment, impacting your ability to meet your other financial obligations.
6. Choose a Food Truck Loan Provider
When choosing a lender, you’ll need to factor in the type of loan you’re pursuing as certain loans are only available through specific food truck lenders. Once you’ve chosen your loan type, you’ll want to ask potential lenders if they’re experienced with food truck financing, including how many loans they’ve funded.
Some questions to ask potential food truck lenders are:
- What experience do you have lending to food trucks?
- What is your success rate lending to food trucks?
- What are your credit decision criteria?
- What documentation will you need to fund my loan?
- How long will it take to get funded?
- Can you pre-qualify me without a hard credit pull?
Understanding how much experience the lender has in the food truck industry as well as their success rate will help you avoid investing valuable time, only to learn that the lender has overlooked a critical underwriting guideline, and your loan will not be funded. You don’t want to get significantly deep into the process and have to find another lender.
A significant hurdle to buying a food truck, or any business for that matter, is loan funding timeframes. In general, SBA loans have the longest funding times, and that may not work for the seller, so you’ll want to account for that in your negotiations. Typically, equipment loans and conventional loans will have the quickest turnaround. Also, ask the lender if they can prequalify you with a soft credit pull, which won’t impact your credit score.
7. Submit Your Food Truck Loan Application
Once you’ve determined which lenders you will apply with, it’s time to submit your application. Many experts recommend submitting a loan application to multiple banks or using a loan broker to ensure that as many banks see your loan as possible. Ask each lender if they can prequalify you using a soft credit pull.
Some steps you’ll want to take as you apply for food truck loans are:
- Assess your business and personal credit: You will want to pull both your personal FICO as well as your business credit score.
- Gather your documentation: Remember that long list of documentation we mentioned earlier? Now is the time to compile it.
- Select your lenders: Put a list or spreadsheet together of the lenders you plan to apply with.
- Apply: If you’re applying to a local bank or credit union, make an appointment to come in. Otherwise, a phone call can usually get the process started.
Getting your personal and business credit scores will help you determine how good of a credit risk you are prior to applying. There are many different ways to determine your scores, including some free options. Many credit card companies offer a personal credit score for free on your monthly statement. Business credit scores can be a bit trickier, so you may want to learn more about the different types of scores and how to obtain them.
Now, it’s time to apply. Before getting started, consider creating a spreadsheet that tracks the lender and date of application as well as other details such as whether the application was successful, interest rate, and forecast closing date. It is recommended that you seek prequalification from multiple lenders or consider using a business loan broker to help you find the best terms and rates.
8. Closing and Servicing Your Loan
The final step in getting a food truck loan is closing your loan. Being prepared ahead of time will help you navigate this sometimes tricky step with ease. See if your lender can provide you with a closing checklist, and determine what other requirements might hold up your loan closing, and ultimately, funding.
Some steps you can take to avoid last-minute loan closing obstacles are:
- Ask for a closing checklist: Most lenders will have a closing checklist. It can be helpful to get this early on in the process so that you know what to expect.
- Factor in time for due diligence: If you haven’t already, you and the seller may want to perform due diligence prior to closing.
- Hold off from any other borrowing: You and your business credit score are critical, so hold off from borrowing until the loan closes.
- Obtain necessary insurance: Your lender may require certain things to be in place, such as vehicle and other insurance, prior to closing.
- Get waivers, if needed: Your lender may require a waiver, allowing access to the food truck by the lender, from any landlord.
Getting a closing checklist from your lender is a highly recommended step. Timing is almost always a factor in a loan closing. If you’re buying from a private seller, they will likely want to close as quickly as possible and may even have had a deal fail on them before. Read through the checklist and look for any potential traps you can plan to avoid.
In many cases, a seller will not allow you to do due diligence until you have an approved loan in place. In that case, you will want to factor in enough time to perform this critical research on the business prior to loan closing. As soon as you determine you are looking for food truck loans, it is a good idea to put off any borrowing or other transactions that will impact your credit. You may also wish to begin comparing food truck insurance options.
Food Truck Financing Alternatives
You may not qualify for any of the options listed above, or perhaps the terms or limitations, such as funding timelines, aren’t attractive. If you’re looking for alternatives to food truck loans, you should know there are several viable options, depending on your needs.
Many small businesses have turned to crowdfunding in an increasingly challenging lending environment, and food trucks are no exception. Crowdfunding works by taking your total needed capital and breaking it up into smaller “bite-sized” pieces that can be funded by a large number of individual contributors, in exchange for some reward for participating.
Crowdfunding is great because it allows you to start-up your food truck business without taking on any outside debt. If you have a creative idea and the ability to market it effectively, a creative crowdfunding campaign can attract investors very quickly. The catch is that most crowdfunding efforts fail to get fully funded. Kickstarter data states that more than 63% of projects are unsuccessful on their platform.
Peer-to-peer (P2P) lending is another option you might consider for funding your food truck. P2P lending works by creating a lending marketplace where borrowers and investors can be matched up. As a borrower, you would apply for a loan in a similar manner to a more traditional bank loan.
An advantage of P2P lending is a quick turnaround from application to funding, which is often as little as one week. However, for borrowers with poor credit, P2P lending might not be available, and borrowers on the low end of the scale may see interest rates as high as 36%, higher than what is likely available through a business credit card.
Business Credit Card
Depending on your circumstances, a startup business credit card might be a good choice, especially if your funding need is short term, or if you’re repairing or updating your existing food truck. Business credit cards are some of the easiest credit for a business to obtain and, since it works like a revolving line of credit, it is a very flexible method of financing.
If you’re considering a business credit card to purchase your food truck, keep in mind that some businesses such as dealerships may not accept credit cards, or may pass on the merchant fees to you. Additionally, credit cards have some of the highest costs of capital, with rates averaging around 18%. This is balanced somewhat by perks such as credit card rewards, and overall flexibility.
Merchant Cash Advance
If you own an existing business and are looking for expansion capital to purchase another food truck, a merchant cash advance (MCA) is an option you might consider. An MCA is a product with quick turnaround times, where your provider buys a percentage of your future daily credit card receipts. On average, they collect between 8% to 30% of your daily receipts until the advance is paid off.
MCAs tend to have some of the highest costs of capital, with factor rates between 1.1x to 1.5x of the amount advanced. This works out to an effective APR of 80% to 120% and, as such, it is recommended that you only consider an MCA as a last resort or short-term funding option.
Rollover for Business Startups
If you have more than $50,000 in a rollable retirement fund, like a 401(k) from a previous employer, a Rollover for Business Startups (ROBS) might be the right fit. A ROBS allows you to invest in your own company by purchasing shares in your business with your retirement fund.
An advantage of the ROBS is it allows you to start a business debt-free and can even be used as an equity injection for a loan. You should consider your options, however. A ROBS requires your business to be a C corporation, and you must plan to work directly for the business for the foreseeable future.
Working with a Broker
You might also consider using a business financing broker. Brokers typically work with large networks of lenders and “shop” your loan to different banks to see which banks are interested in pursuing it. Different lenders have different appetites for loan types so that this approach increases the likelihood of success. One disadvantage is that you will pay a packaging or consulting fee and may pay a higher interest rate.
Food Truck Financing Mistakes to Avoid
As critical as following the proper steps when obtaining a food truck loan is avoiding certain behaviors that can have a negative impact on your outcome. More small businesses fail due to poor cash flow than any other reason. Properly managing debt can mean the difference between stunning success and financial failure.
Some things you’ll want to avoid doing when getting a food truck loan are:
- Don’t commit too early: You should avoid committing to a loan type or lender until you have fully explored and understood your options.
- Minimize hard credit pulls: Ask for a soft credit pull whenever possible. Too many hard credit inquiries will lower your score.
- Avoid taking additional credit: Put off purchases or transactions that will require a hard credit pull or credit reporting decision until after your food truck loan has closed.
- Don’t overextend yourself: Some lending options will have higher payments than others. Avoid putting yourself in a position where you cannot afford to make your payments.
- Read the terms: If a loan sounds too good to be true, read the terms and conditions to uncover any terms that may be problematic.
Selecting the right loan for your food truck might be the most important step you take to ensure the success of your small business. Avoid a costly mistake by not committing to any loans until you have fully researched and understood the different loans and lenders that can serve you.
You must read the terms of the loan you choose to understand the interest rate, monthly payments, what happens if you pay your loan off, or if you default on the loan. Not all loans are created equal, and you should keep an eye out for any catches. Avoid overextending yourself on the payment. When small businesses fail, more than 82% of the time, it is because of cash flow problems.
Getting a food truck loan involves several steps and starts with understanding your credit as well as evaluating what type of equipment you need and what type of lending options are available to you. Along the way, you’ll want to pay attention to caveats such as interest rate, amount of time to fund, and what kind of documentation you’ll need to submit with your application.