Are you one of the many food truck vendors financing or planning to finance your food truck startup with credit cards? Today I examine credit card financing of a food truck business and discuss its downsides and alternatives for prospective vendors.

When using credit cards to finance your mobile food business, you have to be realistic. If you are prepared for problems, you’ll be better positioned if challenges do arise.

Credit Card Financing Your Food Truck Business

If you have a fairly good FICO credit score, it can be easy to get $50,000 in credit. If you have a FICO of 700 or higher, you probably receive a lot of credit card offers in the mail, and simply by accepting them, you will end up with a lot of credit.

The downside of using credit cards to start your food truck business is that you’re typically required to be a personal guarantor and thus are personally liable for all of your business debts. This has the tendency of adding unwanted stress before you even get your food truck on the road.

If your food truck financing needs are fairly low, putting your startup expenses on a credit card is something to consider. By doing this, you avoid having to apply for a loan. You don’t need to bring in a partner.

One reason I’ve heard used for financing your food truck this way is that you get credit card perks that you can use for your food truck such as discounts on gasoline. You can also reverse charges if your truck or equipment are not delivered or their quality is not what was promised.

souped up

Would you help fund your truck through credit cards?

Smart ways to use credit card financing

There have been a lot of recent complaints about food truck builders accepting cash payments but not delivering completed trucks. If you run into this type f issue, you can contact the credit card company to get the charges removed.

There are, however, intelligent ways to use credit card financing for your food truck business. Here are three suggestions that will help you.

  • Never miss a payment. Missing a payment on your credit card can significantly impact your credit card rate due to potential rate increases. Credit card companies often include clauses in their agreements that allow them to raise your interest rate if you miss a payment. This is known as a penalty APR (Annual Percentage Rate), which can be much higher than your regular APR.
  • Separate records. Keep separate cards for food truck business and personal expenses. If you end up getting audited, you want to expose only the financial records required. If everything is on a single credit card, your expenses will be mixed up and may force you to disclose more than desired about your finances.
  • Balance transfers. Consider frequent interest-free balance transfers and playing the free interest for as long as you can. You will save yourself a lot of money doing this.
  • Keep some cash on hand. Keep some spare cash in a separate account. This allows you to make the payments to your credit cards, even if your food truck isn’t producing cash flow yet. If you get credit card checks, then deposit some money into your account and use this to service the debt while you are waiting for your truck to hit the streets.
  • Look for introductory offers. Credit card companies often offer teaser rates, or introductory interest rates, as low as 0% for a period of 12 to 24 months to entice new customers to sign up and use their cards for purchases. This period allows you to pay off your debt with little to no interest, making it an attractive option for financing big purchases or consolidating existing debts. However, the key to benefiting from these rates is to pay off most or all of the debt before the introductory period ends. After this period, the interest rate typically jumps to a much higher standard rate.

It’s important to understand that credit card companies anticipate that many consumers will not pay off the entire balance within the introductory period. They profit from the interest accrued on any remaining balance after the teaser rate expires. To avoid paying high interest, plan your payments to ensure you can clear as much of the debt as possible, if not all, before the low-interest rate period ends.

Dangers of Using Credit Cards

Using a credit card to fund a food truck business comes with significant risks due to the high interest rates that credit cards typically carry. According to CNBC, the average consumer is paying 22.8% interest rate on credit card debt at the time of writing. Here’s how using credit cards can get you into trouble.

Let’s say you decide to pay $5,000 for a commercial-grade espresso machine to be installed on a coffee trailer at a 22.8% annual interest rate. If you make monthly payments of $100, it would take approximately 160 months or more than 13 years to pay off. Over this period, you would pay approximately $10,916.46 in interest alone.

This means the total amount paid for the espresso machine would be about $15,916.46, which is more than three times the original price of the machine. That could leave a bitter taste in any operators mouth.

This example highlights the substantial cost of financing a purchase with a high-interest credit card, especially when making only minimum or low monthly payments. The interest can quickly accumulate, significantly increasing the total repayment amount and extending the debt repayment period. Make sure you run the numbers and create a repayment plan that you feel comfortable with before making the purchase.

It’s crucial to remember that if you use a personal credit card to fund your business, such as a food truck, and the business fails, you are still legally obligated to repay the credit card bill. Credit card debt is tied to you and not to the success or failure of your business.

This means that any debt incurred on the card remains your responsibility, regardless of the business outcome. Failure to repay this debt can lead to serious personal financial consequences, including damage to your credit score, potential legal action, and the inability to obtain future financing. Always consider this risk when deciding to use personal credit to start a business.

Know the dangers of using credit to fund a business. 

What Do Personal Finance Experts Say?

I’m a big fan of the personal finance expert Dave Ramsey. I know for a fact, Dave would not approve of ever taking out a credit card loan to start a food truck. In general I think most financial experts would tell you to look at the pros and cons of putting some of the startup costs on a card.

Taking out a credit card loan to finance your food truck business comes with both potential benefits and significant risks. On the one hand, credit cards are a readily accessible source of financing, which can be especially appealing if you’re unable to secure other forms of loans due to credit issues or lack of collateral. They also offer the flexibility to cover a range of startup costs as they arise.

However, the downsides are considerable. Credit card loans often carry high interest rates, which can significantly increase the total amount you’ll pay back over time. If the business doesn’t generate revenue as quickly as anticipated, you could find yourself in a deepening cycle of debt. Moreover, using personal credit for business purposes can negatively impact your personal credit score, especially if you struggle to keep up with payments.

It’s crucial to have a clear plan for repayment and to consider alternative funding options before relying on credit cards. While they can be a tool in your financing toolkit, they should be used judiciously and with a solid understanding of the costs involved.

Alternatives to Credit Cards

Exploring alternatives to credit card debt for financing your food truck business is a wise approach. Here are a few options to raise funding for a food truck that don’t rely on going into high-interest credit card debt.

Personal Savings

Using personal savings is often the first option to consider. It’s the safest route in terms of risk since you’re using your own money and not incurring debt. The key here is discipline in saving and planning, ensuring you have enough to cover startup costs without depleting your emergency fund.

Small Business Loans

Securing a loan from a bank or through the U.S. Small Business Administration (SBA) can be more advantageous than credit cards. These loans typically offer lower interest rates and longer repayment terms. The application process can be rigorous and require a solid business plan, but the financial benefits make it worth considering.

Crowdfunding

Crowdfunding platforms allow food trucks a newer way to raise money from backers that often doesn’t need to be repaid. This method can also serve as a marketing tool, building a community around your business before it even launches. While success isn’t guaranteed, it’s a way to raise funds without taking on debt.

For prospective food truckers struggling to find funding, borrowing against a credit card can be an attractive option. If you feel using a credit card financing for all or part of your food truck business is the best option for you, be sure to read the fine print before accepting your next credit card offer. You also want to know when your teaser rate ends and what percentage of interest you’ll be paying. Understanding the risks before you accept the offer can save you a lot of financial pain in the future.