How the Food Truck Boom is Eating Up Business Loans
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UPDATED: Jun 6, 2013
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Nobody can stop talking about food trucks. Even social media isn’t safe from the trend. In fact, there has been a recent proliferation of television shows specifically about this food truck phenomenon.
Just what is driving this national food truck craze?
While the public’s recent infatuation with unique and gourmet comfort foods is responsible for supplying food truck operators with demand, those food truck operators are being held up by business loans. Mobile eatery entrepreneurs can borrow business loans from lenders who are eager to ride the boom, while also backing a food-based business that doesn’t require the massive investment of a brick and mortar restaurant.
According to the National Restaurant Association, food trucks account for $650 million in restaurant industry revenue annually. Emergent Research, a small business research and analysis firm, predicts that food trucks will reach $2.7 billion in revenue by 2017. This large growth will be a welcome addition in the coming years as America’s economy recovers, however the growth made by food trucks won’t be self-funded.
Like all industries, food trucks typically require some type of business loan or commercial funding to get started due to the costs involved with purchasing a truck, insurance, permits, cooking equipment, fuel, employees, and other miscellaneous overhead. By delving into the food truck industry’s financial workings, America can see how an innovative new market has aided the ongoing economic recovery and how business loans have fueled this craze into its booming existence.
Ordering a Business Loan from a Lender’s Menu
Alex Dang, Business Development Officer for Opportunity Fund, told loans.org that food truck entrepreneurs need business loans mainly to purchase the actual truck.
He explained that lenders typically look to see if the borrowers have sufficient experience or knowledge of food services, cooking, small business management, and the scope of a food truck business. For existing food truck entrepreneurs who are seeking to purchase another truck to add to their fleet, lenders view cash flow and management before determining whether the borrower can support an additional truck.
“Credit needs to be on-time for all applicants because almost all food truck entrepreneurs are owner-operators; they’re part of the business,” said Dang.
He noted that the food truck business has been around for a long time, but the popularity of the industry has only surged in recent years along with the challenges facing business loan borrowers.
“Factors such as high percentage of cash transactions, food-related industry, and the very specialized, relatively low value, and used-nature of the collateral/asset (food truck) are challenges in obtaining a loan,” he said.
As a result, most banks and conventional lenders haven’t had much experience in lending business loans to the food truck industry—let alone possess an understanding of the industry’s nuances. Most lenders tend to treat food trucks the same as a restaurant or any other business, which causes problems for applicants.
In fact, Trevion Blanding, COO and Partner at Small Business Owners of America, noted that he felt the chances of someone getting funding for a brick and mortar location are much higher compared to a food truck. But in today’s borrowing climate, small business owners everywhere — whether they ride of trucks or operate in a building — are struggling to find capital.
“Unfortunately traditional lenders are afraid to give money not just to food trucks but to small business owner’s period,” said Blanding. “You have to consider that there are currently 2 million businesses in the U.S. with 25 employees or less which account for more than 40 percent of the jobs in the U.S. economy. This overlooked demographic is constantly getting turned down and rejected by traditional banks and lending institutions because they are judged by their personal credit score rather than by the strength of their business.”
Blanding told loans.org that food trucks have become a much more accessible business venture for entrepreneurs since the costs are always far less than $500,000—which is the average cost of starting a brick and mortar restaurant.
“Also television reality shows about the food car business have motivated a lot of people to jump into this industry,” said Blanding.
However, if television is anything to go by, this trend may go as quickly as it came.
Food Truck Boom or Bust?
It is easy for critics to simply comment that the food truck craze is little more than fad that will soon bust. In fact, some lenders are certain about it. However, Dang doubts that this would be a main reason for lenders deny applicants money.
“I don’t think this is a primary reason why they do not lend to food trucks,” said Dang. “I have heard this comment before, but I think lack of understanding of the industry is a bigger reason. Food truck loans are typically repaid within 4 years. Even if it’s a fad, the entire industry isn’t going to go away before that.”
An even greater boon to the already low operating costs of food trucks is that they generally fail more infrequently than other businesses.
“Although some food truck businesses do fail frequently, the food truck business is growing at an extremely fast pace,” said Blanding. He continued to explain that he felt food trucks would only grow in popularity and profits over the next four years.
Food Trucks vs. Restaurants
When it comes to financing, food trucks only have one comparable example: restaurants. Of course, both offer food products yet one is entirely mobile while the other is physically stuck in one location. However, these aren’t the only differences.
“The primary differences are that marketing is exponentially more important with food trucks, it’s also very seasonal (especially in regions that get very cold in the winter), and almost all staff need to be able to run the front and back of the house,” said Dang.
However, many factors between restaurants and food trucks are indeed the same—namely credit, cash-flow, management know-how, and the desire to maintain good tasting food.
Likewise, food trucks and restaurants require a variety of permits and licenses depending on their city, county, and state.
Blanding pointed out that certain cities require parking permits—a vital necessity for food trucks to reach areas of high commuter traffic and easy accessibility for customers.
He also noted that traditional lenders are more comfortable lending to a physical brick and mortar business — namely a restaurant.
“Many food trucks run into funding issues because they are seasonal businesses and most of the money is made in the summertime rather than year round… this is an issue for most traditional banks as well,” said Blanding. “Also when lending to a brick and mortar restaurant there is potentially a building or a large amount of equipment that can be used as collateral for the loan.”
A Yummy Business Future
Food trucks may or may not be a passing fad. With how integrated their whole business model is with social media though, it is probable that they will be around for quite a while.
More specifically, food truck businesses can rely on the eagerness of entrepreneurs entering into the industry since the barriers to entry are far lower than opening a traditional restaurant. Food truck entrepreneurs mainly derive from the culinary field, so the option to enter into business as a mobile eatery over the high expense and physical limitations of a restaurant speak for themselves.
“I’m not going to speak to shifts in urban consumer preferences, but the start-up cost for a food truck is much lower than a restaurant,” said Dang. “For many chefs and even home cooks, the food truck is a more feasible step.”
Dang also advised that crowdfunding — a form of funding that could potentially be commonplace in the future — would doubly benefit food truck entrepreneurs by marketing them and spreading “the word” on top of helping them get funds.
While Blanding did point out that crowdfunding is an inexpensive way to raise capital, it does require a ridiculous amount of energy, marketing, and promotion.
Should business loan financing and crowdfunding not be an option, then budding food truck entrepreneurs can always pursue microloans.
“As a matter of fact the SBA has 110 microlending partners stationed across the country that can lend up to $50,000,” said Blanding. “A microloan is a lot easier to obtain for a food truck business than other sources.”
Whether by microloans, business loans, or crowdfunds, food trucks—a modern re-invention for the social media-connected age—seem here to stay. If business loan borrowers can select their financing wisely, then America will taste the benefits of successfully funded mobile eateries that are one tweet away from filling empty bellies.