Looking to start your own food truck? Great! But did you know most food truck businesses are started with financing?

In this article, we’ll discuss how you can get financing for a food truck, what to look for when getting financing, and which financing options are available to food trucks.

Key Takeaways:

• First, consider your options before determining which kind of financing is best for your business. Once you’ve chosen a type of financing, compare lenders to get the best terms.
• Next, submit an application with the lender you’ve chosen. After you’re approved, sign the loan agreement proposed by your lender.

How to Secure Financing for a Food Truck

1. Determine Your Options

Food truck businesses can access most kinds of financing, but what’s best for one business may not be best for another. This is why it’s important to compare your options before deciding on which type of financing to opt for.

Do you need funding as soon as possible? A merchant cash advance (MCA) with same day funding or business line of credit may be what you need – both of which can be secured with bad credit or limited business history.

A Small Business Administration (SBA) loan can also be secured with bad credit, but it can take three months or longer to get the funds in your bank account. If your credit is strong and your business is in good financial shape, you could get great terms on a conventional term loan.

Then there’s equipment financing, which is popular among food truck businesses. In fact, many get this type of financing to pay for the trucks in their fleet.

Lastly, determine why you need financing in the first place. Some types of financing have use restrictions, meaning the funds can only be used for a pre-approved purpose.

2. Consider Your Business’ Creditworthiness and Finances

It’s important to consider your business’ creditworthiness before applying for financing. If you honestly assess your creditworthiness, you’ll have a good idea of which lenders are likely to approve financing and which aren’t.

Similarly, you’ll need to assess your business’ finances. Look at important metrics, including profit, revenue, cash flow, and debt. If you don’t have a lot of data because your business is in its infant stages, it may be harder to get certain kinds of financing including conventional term loans and equipment financing.

To assess your creditworthiness, first see what your personal credit score is. Most lenders consider a score of 670-739 good; 740-799 is very good and 800+ is excellent. Next, look at your credit report. If you’ve consistently made repayments on time and don’t have a lot of debt relative to available credit, most lenders will deem you’re eligible for financing.

3. Compare Lenders

Comparing lenders is essential because lenders rarely offer identical terms at the same time, meaning you could get significantly favorable terms if you look hard enough.

When comparing lenders, you’ll want to consider interest rates, repayment terms, speed of funding, loan use restrictions, and eligibility requirements.

Llama Loan offers some of the most competitive rates and terms you can find – so reach out to us today to get started!

4. Prepare Required Documentation

You’ll need to submit specific business and financial documents to be eligible for financing, including:

• Personal and business credit reports
• Profit and loss statements
• Balance sheets
• Cash flow statements
• Tax returns
• Financial projections
• Legal agreements

If the lender doesn’t require documents that you believe would help them make a decision, it’s best to have these ready anyway. The lender may ask for these during the review process so having them ready in advance ensures the review process isn’t lengthened.

5. Submit Your Application

Fill out an application with the lender you’ve chosen and double-check it before submitting. Most loan applications are filled out and submitted online, but do whatever is preferred by the lender; this way the review process doesn’t take longer than it has to.

6. Read and Sign the Loan Agreement

Once you’re approved, the lender will send over a loan agreement for you to review and sign. If you have any questions, ask the lender for clarification. If you still have questions after speaking with them, hire a business attorney who specializes in loan agreements to look over the document for you. If there are any red flags, they’ll make sure you know what they are.

When everything in the agreement looks good, sign on the dotted line and send it back. Once the lender confirms you’ve agreed, they’ll get the disbursement process in motion. Depending on the lender and the type of financing you chose, it could take anywhere from 24 hours to 7 days to get the funds you were approved for.

Types of Financing Available for Food Trucks

Term Loan

A conventional business term loan is a kind of financing that many businesses get. These loans usually have an interest rate between 7% and 12% and a term of several months to 30 years. The average loan is around $650,000, but some businesses get multi-million-dollar loans.

To get a conventional business term loan from a traditional lender you’ll need good credit and solid business financials. Online lenders are more flexible when it comes to eligibility requirements, but they also want to see that a borrower has decent credit before lending to them.

Additionally, you’ll need to submit a detailed, feasible business plan and loan proposal to get a conventional term loan. The business plan basically explains how the loan will help your business while the loan proposal explains how you intend to pay the loan back.

You’ll also need to put up collateral worth 80%-100% of the loan’s value to secure a business term loan. Homes, vehicles, and valuable collectibles are all examples of acceptable collateral. However, the lender will want to appraise what you’re offering up before they accept it as collateral. If you default, they’ll seize and sell your collateral to recoup what they lost.

Even if the lender doesn’t require collateral, they’ll probably make you sign a personal guarantee, wherein you agree they have the right to seize and sell your personal property.

A down payment of 10%-30% of the loan’s value may be required as well to reduce the lender’s risk.

Conventional loan repayments are often made on a monthly basis, but you may have to make bi-weekly or even weekly repayments.

SBA Loans

An SBA loan is essentially a conventional business loan that’s backed by the SBA. They’re easier to get but have stricter repayment terms and higher interest rates.

There are different kinds of SBA loans, but the most common ones are 7(a) and 504 loans. 7(a) loans usually have a term of several months to 10 years and many businesses get one when they need a boost in working capital. 504 loans have a term of 10-30 years and are usually used to purchase or develop real estate.

Each loan has its own use restrictions and eligibility requirements, but your business needs to make a profit and be located in the United States to be eligible for either loan.

You also need to put up collateral to secure an SBA loan, unless it’s for less than $50,000. If you default, your collateral will be seized and sold. However, the SBA does have a loan forgiveness program: SBA Offer in Compromise (OIC). If you’re accepted into this program, you’ll only have to pay back a percentage of what you owe after defaulting.

A down payment of 10%-30% is required as well. If you have bad credit, expect a down payment closer to 30%.

Finally, it can take 2-3 months to get funds from an SBA loan, so they’re definitely not for businesses that need cash immediately.

Business Line of Credit

A business line of credit is different from the types of financing discussed thus far in that it’s a kind of revolving credit. This means your available credit goes up and down in accordance with how much you spend and make repayments.

For example, if you have a $10,000 credit limit, you spend $5,000, and then pay back $2,000, you’ll have $7,000 in available credit.

Generally, business lines of credit are easier to secure than other kinds of financing; you can even secure one with bad credit and limited business history. But they tend to be more expensive, mainly because there are a lot of fees and the interest rates are higher.

Additionally, you only have access to the credit line for a certain number of years. If you have a balance after the credit line expires, it’ll be converted into a term loan.

In short, they’re very similar to business credit cards, and many businesses use them to cover unexpected charges and working capital expenses.

Merchant Cash Advance

A merchant cash advance is considered alternative financing, but it’s not drastically different from a conventional term loan. In both cases you get a lump sum that has to be paid back and the lender makes money by letting you borrow.

But there are some key differences to be aware of before you get this kind of financing. For one, eligibility is determined by your history of card sales. Basically, if you’ve done a considerable volume of card sales over the last 3-6 months, you should be eligible for a merchant cash advance.

Also, repayments are a percentage of card sales over a certain period, meaning they can be small or large. Plus, there are no interest rates. Instead, factor rates of 1.1-1.5 are used. For example, if you get a $50,000 merchant cash advance with a factor rate of 1.3, you’ll have to pay back $65,000. Lastly, MCAs can usually be secured in 24 hours or less.

Equipment Financing

If you have a car loan or mortgage, understanding equipment financing shouldn’t be hard. Basically, you get a loan to purchase a piece of equipment. Once the loan is paid off, you own the equipment.

It’s possible to get one of these loans with bad credit, especially if the equipment is relatively inexpensive. The average interest rate on an equipment loan is around 20%, but you’ll probably get a lower rate if you have good credit and a convincing loan proposal.

Lastly, before you get equipment financing, you need to understand the concept of useful life, as this is a major factor lenders will consider when reviewing your application. Essentially, most lenders will only finance equipment that has a useful life longer than 10 years. But if your equipment dies before the loan is paid back, you’ll still be responsible for what you owe.

What to Consider Before Getting Financing

Purpose

Determining why you need financing will help you select the best type of financing for your business. Does your business need new equipment? Equipment financing may be the solution. Do you need funds to purchase real estate? An SBA 504 could work. Low on working capital? Securing a merchant cash advance will supply the funds you need.

Of course, you could get a conventional term loan when you need to purchase new equipment or real estate, but usually lenders that specialize in a particular kind of financing offer better terms.

Eligibility Requirements

Some lenders are quite strict when it comes to eligibility requirements, whereas others have minimal eligibility requirements. For example, traditional lenders tend to have stricter eligibility requirements than online lenders. The SBA has minimal eligibility requirements because they want most businesses and entrepreneurs to have access to capital.

Good credit and decent business finances are requirements for most financing, but you can get a loan with bad credit and limited business history. Generally, SBA loans, merchant cash advances, business lines of credit, and even equipment financing can be secured with bad credit.

If bad credit or limited business history is keeping you from getting funding, consider bringing on a co-signer. Their good credit will offset yours to a certain extent. Also, the lender won’t have as much risk if a co-signer backs your loan, as they’ll be able to demand payments from the co-signer in the event you can’t pay.

Speed of Financing

The time it takes to get financing is important too, especially if you need funding right away. Merchant cash advances and business lines of credit are great options for businesses that need funds fast, but there are drawbacks. Specifically, merchant cash advances can be quite expensive and business lines of credit can have high interest rates and a significant amount of fees.

It can take months to get funds from an SBA loan, mainly because the SBA uses an application review process that’s incredibly thorough. Equipment loans and conventional loans can be secured much quicker; usually it takes just 7 days to get funds from either.

Interest Rate

The interest rate you get essentially determines the cost of financing. To get an interest rate that’s at the low end of the range, you’ll need good credit and solid business finances.

The average interest rate on a conventional business term loan is around 10%, whereas ~13% is the average interest rate on an SBA loan. The average interest rate on an equipment loan is around 20%, and on a business line of credit it’s 18%.

Term (Duration)

The loan’s term, or duration, is important because it plays a role in determining the overall cost of borrowing. Basically, loans with a longer term tend to be more expensive because the borrower has to pay more in interest.

Most working capital loans have a term of several months to a few years, whereas loans for equipment and real estate usually have a term of 10-30 years.

Restriction

Some loans have use restrictions, meaning they can’t be used in certain ways. SBA loans have the most use restrictions because they’re backed by the Federal government. For example, an SBA 504 loan can’t be used as working capital, while a 7(a) can’t be used for debt consolidation.

If you use the funds for something prohibited by the lender, you’ll have to give the money back right away. Additionally, you may be penalized for improper use of funds.

Repayment Terms

Some loans have stricter repayment terms than others. For example, merchant cash advances are often paid back on a weekly basis. Bi-weekly repayments are required for some conventional loans, but usually repayments are made on a monthly basis.

Final Thoughts

Getting financing for a food truck is actually quite simple. Just determine which type of financing is best for your business and find a lender that’s willing to extend that kind of financing on good terms.

After you’re approved, sign the loan agreement proposed by your lender. Depending on the lender and the type of financing you’ve chosen, it could take anywhere from 24 hours to 7 days to get the funds in your business bank account.

Ready to get started? Contact us today to speak with one of our funding experts!