How to Start a Food Truck 12: Choose Your Financing Path
FoodTruckrs, today is a huge milestone in the “How to Start a Food Truck” series — so we hope you’re ready!
If you’ve been following along for the past three months, you’ve done some serious thinking, researching, and planning for your food truck dream. After everything from figuring out what you’re going to sell to learning about health code laws to writing a food truck business plan, you’re almost ready to get out there and make it all happen. So starting next week, we’re moving into April and a new unit that’s all about taking action on your dreams.
Can you taste the excitement? We sure can! You’ve come a long way, and you’re almost ready to go out and buy your very first food truck. There’s just a few more lessons you need to complete before you’re ready, and we’ve got them right here on FoodTruckr — starting with today’s new lesson on food truck financing options.
Is it better to self-finance or to take out a loan from the bank? How do crowdfunding sites like Kickstarter work? What are the pros and cons of finding an investor to finance your truck? We’ve got the answers to all those questions and more — so let’s get rollin’!
Determining Your Startup Costs
When you completed your food truck business plan in Lesson 09, you estimated your business expenses for getting started and your anticipated costs for the next several years. The costs for starting a food truck vary widely, so you researched everything from parking laws in your city to restrictions on commissaries in order to determine how much cash you really need to get on the road. If you haven’t completed those lessons yet, you’ll need to head back and finish them up before you can start planning how to finance your truck. Don’t worry; we’ll still be here when you get back!
Already completed those lessons and have a figure for your estimated business expenses in mind? Great job! But we’re not quite done yet — that’s only the first half of what you’ll need. You also have to plan ahead for your personal expenses. To fully pursue your food truck dream, you’re almost certainly going to have to quit your day job and pour all of your time and energy into this new endeavor, which means you won’t have a regular cash flow coming in any longer.
Unfortunately, too many entrepreneurs set out to follow their dreams without making sure they have a safety net in place first. We don’t want to see that happen to you.
Figure Your Personal Expenses
You probably already have a good idea of how much your monthly bills and living expenses cost, but you should itemize them here to make sure you’ve covered everything. Be sure to include:
- Your mortgage or rent payment
- Car payment, gas, and insurance
- Groceries
- Credit card bills
- Health insurance and medical costs
- Student loan payments
- Electricity, water, trash, and other utility bills
- Cell phone and Internet service
- Entertainment expenses
- Subscription services
- Discretionary spending
How many months of personal expenses should be included with your truck’s startup costs? The amount you save or finance is entirely up to you, but we recommend starting out with enough to cover at least six months’ worth of expenses.
If you’re able to, it’s also a good idea to pay down any debt you have before getting started. Credit cards and student loan payments will eat up valuable cash that you could be putting toward more necessary personal expenses. Do whatever you can to attack these debts head-on so that you’re working with a positive net worth or at least dealing with very minimal bills once you’re deep in the trenches of entrepreneurship.
Of course, we should also note that many FoodTruckrs have started out with less and turned their businesses into major success stories. It can be done, but keep in mind that you rarely hear about all the aspiring entrepreneurs who didn’t have quite the same luck. You never know how long it’s going to take to get your truck up and running and to start netting sales, so you need to be prepared for the long haul. We’re all for taking risks and bucking trends, but we also believe it’s important to make smart, sound decisions when you’re dealing with your finances and the livelihood of you and your business.
Now that you’ve determined how much cash you’re going to need, let’s tackle a harder but equally important question: Where is that money going to come from?
Food Truck Financing Options
There are several major financing options for food trucks, so it’s important to carefully weigh the pros and cons of each situation before choosing any one financial avenue. Let’s take a look at the three most common financing scenarios:
1. Self-Financing
Coming up with the funds to self-finance your food truck isn’t easy, but it is a highly effective (and paperwork-lite!) route to getting your truck on the road.
The Benefits of Self-Financing: Covering the costs of your food truck from your personal savings has one major benefit — you won’t incur any debt. Every path to food truck financing involves taking on a lot of risk, but in this case, you’ll know exactly what you’re risking upfront and you won’t end up paying a bank thousands of dollars in interest charges. Whereas other financing options require you to achieve a certain threshold of success in order to pay back your lenders or investors, this option means any profits you make are yours and yours alone. For the entrepreneur who is determined to bootstrap his or her way to success the old-fashioned way, self-financing is a great option.
Self-Financing Challenges: Naturally, the most challenging aspect of self-financing is coming up with the money in the first place. You either need to have money saved aside that you can afford to invest in an uncertain business or you need to start saving now in order to come up with the necessary funds, which could take quite awhile. If you do already have the money in savings, be sure that it’s money you can really afford to do without. Don’t cash in your retirement fund or life savings for an unpredictable startup business (particularly one in an industry as challenging as the food industry!).
How To Self-Finance: If you already have the money saved, self-financing is a pretty easy route — you’ll just need to analyze the costs and risks associated with starting a food truck and determine whether or not you feel comfortable investing your savings in this path. If you’re determined to self-finance but you don’t have the money saved yet, you’ll have to start earning more or spending less until you reach your funding goal. We’ll discuss this more in next week’s post on emergency funds, so stay tuned!
2. Loans and Investors
If you don’t already have a healthy nest egg saved and you’re looking to get started sooner rather than later, you may want to consider the economic viability of taking out a loan or finding an investor to finance your food truck.
The Benefits of Loans and Investors: Taking out a loan or finding an investor is one of the fastest ways to get the startup cash for your new food truck. Though you’ll need to spend some time preparing your business plan and researching all the financial factors such as costs, anticipated profits, and expenses, you should end up with a great idea of what it’s going to take to run a successful food truck. Then, you can talk to your local bank or financial lender to get the funds you need for getting started.
The Challenges of Using Loans and Investors: There are a few challenges you’ll need to overcome before getting a loan or investor for your food truck. First of all, you must qualify for financing. Potential lenders and investors will likely want to check your credit history and learn about any existing debts or outstanding account balances you may have before extending a financing offer. Additionally, you should also be aware that you might not see a very high percentage of your food truck’s first profits. If you get a loan, you could be sending most of that money right back to the lender to repay your debts (with interest) — and if you have an investor, you’ll be sharing the profits with the person or organization who helped you get started.
How To Find a Loan or Investor: Now, if you’ve been following along with the “How to Start a Food Truck” series, this is where some of your hard work and research will really start to pay off! Gather all of your financial records, yourbusiness plan, and any other documentation you have before seeking a lender or investor. Set up a time to meet and be ready to answer all sorts of questions about the viability of your food truck business and how quickly you expect to begin turning a profit. It’s up to you to sell the lender or investor on why your fledgling food truck business has a real shot at success, so show them how well you’ve done your homework on the industry by walking into the meeting fully prepared and armed with loads of facts and figures.
3. Crowdfunding
For many food truck owners, crowdfunding websites like Kickstarter andIndiegogo are an appealing financing choice. Crowdfunding sites are a quick way to finance your project without taking on a huge debt. You can request funding for all or part of your food truck business and people can donate any amount they choose. Many food trucks have successfully funded their businesses through crowdfunding sites, including trucks like Bakin’ Bakery and Fresh Food Generation.
The Benefits of Crowdfunding: Crowdfunding is an easy and fast way to get the money you need for your food truck without going into massive debt and without having to wait around until you’ve saved up a sizeable nest egg. These sites are also a great way to begin building an audience before you’ve even launched your business — your backers receive small rewards for donating, and everyone who has contributed to your food truck fund will be excited to see you succeed!
The Challenges of Crowdfunding: Crowdfunding campaigns require a lot of work and commitment to succeed. You’ll need to design a compelling campaign with great incentive bonuses because with many crowdfunding sites, you won’t receive any of the money if you fail to reach your final goal. During the campaign, you’ll spend a lot of time raising awareness and promoting your cause, and once it’s over, you need to be ready to start fulfilling those rewards right away.
How To Crowdfund Your Food Truck: Choose one of the major crowdfunding sites and set up your project with details on your proposed food truck plan. Then, begin advertising and let people know what will be so special about your truck! You also need to create (and fulfill) the rewards system for the people who donated to your cause.
Select the Best Financing Option
There are definite pros and cons to each financing method, but many FoodTruckrs will find one option that stands above the others by thinking carefully about their priorities. Consider what’s most important to you: do you want to get out on the road as quickly as possible or minimize the amount of new debt you take on in the beginning?
Be sure to consider:
- Your Timeline: How quickly do you want to open your food truck business? Are you eager to make it happen sometime this year? If speed is a priority to you, you may want to look into a loan or investment opportunity that will help you get going right away.
- Your Financial Situation: What’s your credit history like? How much debt do you have? What kind of savings do you have in place? You need to think about your financial situation and how likely you are to be able to come up with the cash on your own before choosing a single financing option. If you’re in good financial shape already and you’re pursuing this opportunity simply because you’re passionate about owning a food truck, self-financing could be a good option for you. If you have a big idea but you’re not sure you can afford to take on the financial risk on your own, you could consider running a crowdfunding project to gauge public interest and to cover part of your costs.
- Your Goals: What do you hope to achieve with your food truck business? Are you trying to create a massive empire with a fleet of trucks and several brick and mortar locations? Or is making it to opening day your #1 priority? Aspiring truck owners who are already dreaming big and thinking about their long-term futures may want to pursue financing opportunities from investors or lenders that could offer greater startup capital.
The Final Choice
No matter which financing option you choose, be sure it will allow you to cover all of your business expenses and your anticipated personal expenses for any time that you may be without a regular income. Once you are confident that your personal expenses are taken care of, you’ll be less stressed out and able to focus all of your attention on making your new food truck as incredible as it can be.
Financing for your food truck is a very personal choice, but you should also speak with a trusted financial advisor before choosing any one financing path. You may also want to consider talking to food truck organizations or food truck owners to see if any of them can share their financing experiences and advice with you. And of course, the FoodTruckr team is available to help you in the comments below, on Facebook, or through email if you have any questions about financing options for your new food truck business.
Next week on “How to Start a Food Truck,” we help you build an emergency fund so that you’ll be financially secure before you begin shopping around for your food truck. There’s lots of awesome action-oriented lessons on the way in April, so put on your seatbelts and get ready to go!
This blog originally posted on Foodtruckr.com on March 26, 2014.
