When starting up a new mobile food business, one of the first areas most prospective vendors get discouraged by is how they will come up with the money they will need to get their rolling bistros onto the street. Funding your food truck isn’t always easy. The key is to understand your funding options and then determine the best source for your specific situation. But first, you’ll need to determine how much funding you’ll need to open the business.
How much funding do you need?
Before you determine where to get funding, the first thing you’ll need to estimate is how much money you’ll need to open the business. Not only will you need to estimate how much you need to invest in a food truck, trailer, and equipment, but you’ll also need to consider monthly expenses like labor, insurance, and taxes during that those first few critical months in the business when sales may be softer.
As an aside note, I will also say that if you know exactly what you plan to spend each dollar one, you’ll increase your odds of someone else lending you that amount of money. At the very least, you’ll be demonstrating that you’re serious about making this business work.
Purchasing your food truck or cart will always be the biggest expense for this type of business. Of course the cost to start a food truck will depend on a variety of factors like the kitchen equipment you need installed, unit size, wrap, and other factors.
Here are some other considerations you may need to raise funds for:
- Payroll (for you and any employees)
- Point of sale system
- Commissary rent
- Signage
- Fees and licensing
- Food inventory
- Kitchen supplies
- Truck and equipment maintenance
- Insurance
- Taxes
Make sure you allow enough money for the true expenses associated with running your mobile business for at least the first year of its operation. (And don’t forget to pay yourself first.) Make sure you’ve planned for additional employees, food production increases, additional fees and licensing for new locations to sell your gourmet fare in.
One of the top reasons many new businesses fail is because they don’t get enough start-up capital. The other reason is poor management. Realistically estimate your financial needs and leave room for the unexpected, or you may unexpectedly be out of business.
Funding Your Food Truck Start-up
Now that you’ve got a idea on how much money you need, the next step is to figure out how and where to get that capital.
Types of Capital
You have two choices when deciding which type of capital funding you want for your prospective mobile food service business.
With debt capital, you will be getting a loan that must be paid back over a set period of time, with interest and possibly some additional fees. In this scenario, you maintain full control of your company, but you will also have a loan to pay back when everything is said and done.
Equity capital is funding provided by people or firms who want to own a part of your food truck business and reap some of its rewards once you become a success. What you must ask yourself with this style of capital is, do you want to give away part of your company in exchange for the cash you need to make it happen? Or, do you think you will be able to make the monthly payments towards a loan so you will be able to maintain full control and ownership of your brand?
Starting with a small cart can save you money.
Ask Yourself Some Important Questions
To determine the type of funding you should go after, ask yourself questions like these:
- Could I qualify for debt financing?
- Am I willing to lose my house if the business does go under?
- Will I be able to make the monthly payments to pay off the debt?
- Will the lender give me more money if I need it?
Or, for equity financing:
- Would investors even be interested in my concept?
- Am I really the control freak people say I am?
- Is it okay for someone else to go through my financial information?
- Am I going to be able to give investors the information they need?
- Am I going to have a problem sharing my hard-earned profits?
Determine Funding Sources
Once you’ve mulled over those questions, and are completely confused, remember, you can always make use of more than one funding source. Some of your choices for funding your new food truck or cart include:
- Personal savings
- Borrowing from friends and family
- Loan from retirement account / 401K
- Getting a loan from a bank
- Getting a loan through the U.S. Small Business Administration
- Getting a partner and using his or her personal funds
- Going through a commercial finance company
- Going the venture-capital route
- Crowdfunding
Keep in mind that funding sources are not created equal. Some require much more effort than others to tap into. For example, you can request a loan from your 401K and have a check delivered in less than 30 days. On the other hand, launching a crowdfunding campaign to raise funds can become a full-time job for months leading up to the launch. Be realistic about the approach you want to use.
Crowdfunding can be powerful, but it’s not easy.
Please Note
You will probably be able to get more money from investors than from a loan, but one of the top reasons culinary geniuses start up a mobile food business as opposed to a brick and mortar establishment is because they do not need as much capital to start up.
I opened a food cart through a blend of personal savings and a loan from my 401K. I spent three years of careful saving and planning before I made the purchase too. Everyone’s story raising startup capital is a little bit different.
Now we’ll wade through the the first two sources for funding, and go over some of the pluses and minuses of each.
Using Personal Funds
Depending on how much cash that you determine you will need, you may find that using personal funds is your best option. Over 50% of small business start-ups are financed with personal funds. If your business plan does not require hiring employees, or paying exorbitant amounts of cash for permitting, licenses and fees, then you probably can get along fine without much in the way of financing.
Just remember our list of operating expenses from the last article. Your business is going to need to purchasing your food truck or cart, which means spending money. This means you will go into your savings account, take out a second mortgage or home equity loan, get a personal loan, or dig up that jar buried in the back yard.
- Home equity loan. This is a low-risk, relatively simple way to secure funding for your mobile food business. The bank doesn’t really care what you are using the money for, and you’ll be financing your business yourself. Often, having a larger financial investment in the business personally will have more weight if or when you attempt to get a business loan.
- Personal loan. This is also a possibility. Just make sure you let the bank know that you plan on using the money for your food truck business.
Or, start taking advantage of some of those pre-approved credit cards you get in the mail every day. Just be sure you investigate the interest rates, annual fees, and late fee charges. Be careful about this one, although I know some food truck owners personally that have leveraged this form of debt to get started.
If yours is a simple business model, you could also bootstrap it. This means that, with a very small investment, you get the business going and then use the profits from each sale to grow your food truck business. This approach works well in the mobile food service industry when you do not need employees initially.
Borrowing from Friends and Family
Before you use up all of your personal savings to open your food truck, think about your other options. Have you asked Mom and Dad for a loan? Does Grandma have a few thousand dollars that she might like to invest? Has that college roommate really been as successful as he said he was at the last reunion? Tapping into the pockets of friends and family does have some benefits, but it also has its share of drawbacks.
For one, you have to ask them for the money.
If you do end up asking friends and family, make sure you present the business to them just like you would pitch it to a bank. Let them decide whether they want to take the risk. Make sure you have a written agreement or promissory note that specifies the details of the loan. And don’t get upset when they pester you with questions about how their money is doing. This is another drawback of tapping into this particular money source.
Venturing into the “awkward family dinner” territory. Beware that Thanksgiving could turn into a forum on your latest business report. Remember, Aunt Edna’s “loan” might come with more than just financial strings, but annoying discussions at family gatherings.
Overall, borrowing from friends or family is probably not your best choice, simply because of the strain it may put on relationships. However, it does work for many people and may even strengthen your relationship if your business takes off and is successful.
The Bottom Line
I hope you found this article helpful in your introductory steps to creating your own food truck enterprise. In future articles I will go over the other forms of attaining capital such as getting a loan from a bank or SBA.
