Chapter

7

Finding Financing

In This Chapter

Now that you’ve defined your vision in your business plan, including menu, design concept, and possible locations, it’s time to secure the cash to make it a reality. Finding financing for a food truck is no easy task. Many people want to invest in hospitality businesses purely for vanity. They dream of hanging out with their friends at their very own restaurant, especially those with monotonous jobs that don’t fulfill their passion. The reality is that most outside investors in restaurants and similar food businesses never see their money back.

From the perspective of investors, food trucks are more attractive than other hospitality businesses because they can be a relatively low investment with the potential for high returns and spin-offs like bricks-and-mortar restaurants. Your job is to sell outside investors on your dream: that for a small initial investment, they can get in on the next big thing in the food business. Not only that, but there will be incredible potential for expansion and growth. But no matter how good your numbers or your plan, ultimately investors will only put their money behind your business idea if they believe in and like you.

Start-up costs vary with the details of your concept, but in this chapter I help you estimate your initial expenses and set a dollar goal. Then I describe several strategies for reaching that number, including finding an investor, seeking a loan, and the pros and cons of tapping into your own personal savings. Finally I discuss some creative ways to leverage business relationships to free up capital and even extend your credit.

Knowing How Much Money You Need

Before you can borrow money or approach an investor, you have to determine how much money you’re going to need. Estimating start-up costs is a challenge for aspiring and seasoned food truckers alike.

Tip

Once you accept money from investors, you have to continue to prove to them that you deserve their trust and confidence. As you manage and operate your truck, put yourself in their shoes and anticipate their concerns. Don’t allow anything that can be interpreted as wasteful, unprofessional, or potentially threatening to your investors’ bottom line to spur them to interfere with the way you run your business.

Your expenses are determined by the nature of your menu, locations, and the complexity of your truck’s vision. There are, however, many food truck universals and one-time purchases that you can predict to help calculate your start-up total. In general, operators need between $100,000 and $125,000 to properly start a food truck, including purchasing and building a truck and operating capital to launch and manage it until it becomes profitable.

Calculating Your Start-Up Costs

Begin by listing all the inventory items, equipment, and services you require before you open for business. If your menu, design, and overall concept are clearly defined, you should be able to make reasonably accurate cost predictions. Use the following list, with my best estimates provided, to approximate a rough start-up figure if you don’t know your actual expense:

Expense	Cost
Advertising	$5,000
Design	$2,500
Electrical and awnings	$10,000
General operating capital (gas, staff, salary, food and beverages, tickets, insurance)	$25,000–50,000
Inventory (ingredients, beverages, plates, utensils, napkins, etc.)	$2,500
Kitchen supplies (pots, pans, grease mats, etc.)	$3,000
Labor to customize truck	$10,000-15,000
Legal fees	$1,000–5,000
Permits (dependent on location)	$1,500–10,000
Restaurant equipment (stove, sink, fryer, refrigerators, grill, exhaust fan, etc.)	$15,000–20,000
Truck	$10,000–15,000
Truck wrapping	$5,000

Calculating Operating Capital

No matter how strong your concept, menu, and advertising campaigns are, you’ll continue to need money well after you launch your truck. It’s important to have conservative expectations for the amount of revenue you’ll bring in during the first few months and to set aside operating capital to cover expenses during that time. Almost every new food business requires time to hone its operation, refine its menu and pricing, and build a loyal clientele. If you allow yourself an adequate financial cushion, you can use this period to perfect your concept without unnecessary stress.

When preparing your business plan and start-up estimate, assume that you won’t become profitable for several months. Set aside an appropriate safety net—at least $25,000 to $50,000—to cover all your operating expenses, payroll, and advertising, and a weekly salary to cover your own living expenses for the first six months. This cushion should also allow for any unforeseen repairs, upgrades, or changes in inventory as your operation and menu evolve.

Determining Your Contribution

Regardless of how profitable your idea may appear to potential investors, you’ll need to invest a considerable amount of your own money into your new enterprise. You must take a corresponding level of financial risk to back your passion if you want investors to take you seriously. When your own money is on the line, you’ll find yourself even more motivated to succeed, and it’s that determination that will inspire confidence in investors.

Using your own money has numerous additional benefits as well. If you choose not to seek help from investors, you don’t have to divide control of your business with people who may not share your vision. It can be very tedious, not to mention disheartening, to have to answer to others when you’re the one doing all the work to realize a personal dream. Should you want to alter your concept, menu, pricing, or locations, those decisions will be yours and yours alone. You’ll be able to take pride in knowing that your food truck’s success is a reflection of your own dedication, creativity, and the risks you were willing to take.

Beep! Beep!

Be very cautious when using credit cards to finance your start-up inventory and operation. You don’t want to incur high interest charges or destroy your credit rating. While credit cards can be convenient short-term solutions with some real benefits, like frequent flyer miles and cash points, I recommend saving them for the occasional (but inevitable) crisis: theft, equipment failure, or truck damage. There will be times when you’ll have to pay for immediate repairs and seek reimbursement from your insurance company later, a process that can take several weeks or months. Avoid the trap in which too many small business owners have been caught and always regard credit cards as your last and least-desirable finance option.

But before you invest your retirement savings and your child’s college fund, remember that risk also means risk of failure. Should your food truck not succeed, you could jeopardize your savings, your credit, and your assets. Always allow for the worst possible outcome when making any investment. Making a business plan, even if you’re financing the project yourself, will help you spend thoughtfully and predictably, and can alleviate waste, confusion, and surprise. (See Chapter 6 for information on writing a business plan.)

Identifying Investors

Don’t feel bad if you can’t (or don’t want to) finance your food truck venture all by yourself. You can seek financing from many different kinds of investors, from partners to friends and family, but there are important things to consider when seeking outside funds to feed some green into your food truck dreams.

Potential Partners

A partner is an investor who actively participates in the formation and/or operation of your food truck, as opposed to an investor or silent partner, who is distinctly less hands-on. A partner may invest money, expertise, some other financial service, or his or her reputation, filling a void and strengthening your overall concept and operation. A partner doesn’t just invest money in your success; she invests her skills, experience, and sometimes her name and personality. It’s important to choose the right partner for the right reasons. You want someone who won’t just bet on you but increase the odds in your favor.

If you want to bring on a partner, consider your biggest weaknesses and seek someone whose skills can fill those voids. Here are some examples of areas where a partner can fill a void for you:

You can similarly seek partners with marketing expertise, food truck experience, or restaurant management skills.

It’s crucial, however, that whoever your partner is, there’s a clear chain of command that you both mutually agree upon and respect. While the partnership is a collaborative relationship, one person must be in charge so that decisions can be made effectively and problems resolved as efficiently as possible. Many businesses fail because partners haven’t clearly defined their roles from the very beginning and later clash, bringing the entire operation to a halt when no decision can be made.

Truck Tales

Since its launch in 2010, San Diego–based Devilicious has built an enormous following and attracted more than its share of media attention. Classically trained chef Dyann Huffman partnered with Kristina Repp, a seasoned waitress and restaurant manager, to create mobile fare reminiscent of their childhood comfort food favorites. The friends have turned their combined 38 years of culinary experience into a profitable brand that’s widely and wildly blogged and buzzed about, even competing on Food Network’s The Great Truck Race. Interviews with Huffman reveal a distinct division of labor based on each partner’s expertise and a shared love for “devilish comfort food,” as she describes it. They’re the perfect example of an effective partnership: two passionate women, two skill sets, a single vision.

Silent Partners

Outside investors who agree to be silent partners invest cash but have little say in how a food truck is run. Once the business is launched, it’s common for investors to break their silence in an effort to protect their returns. It’s very important, as with taking on a partner, to clearly define your roles in the business from day one.

Family and Friends

You’ve probably been cautioned never to do business with family and friends, and for good reasons: it’s a recipe for financial and emotional disaster. It’s very difficult to hold our loved ones accountable, especially when it comes to something as vulgar as money.

Your family and friends are a wonderful resource for guidance and inspiration but not for capital. If you must seek money from them, be sure to put everything in writing, just as you would structure any other business deal.

What You Need to Show Potential Investors

In order to attract outside investors, you’ll need to have a business plan. The materials you prepare for them should be concise: What are you doing? Why are you doing it? How are you going to do it? And will it make money?

Potential investors will expect to see the following:

How to Structure an Investment

Each investor will have his own preferred method for structuring returns depending on his reasons for investing in your business in the first place. Some investors may want to make a quick buck and seek a short-term compensation deal, while others, perhaps those who love the food business and want to be involved in your operation, will seek a long-term payment plan.

It’s important to negotiate a deal that’s fair to your investor, fair to you, and puts reasonable pressure and expectations on the business. The terms of your agreement must be clearly outlined in writing and be vetted by your attorney. Don’t accept a deal that could potentially overburden your business with unrealistic payments or timelines; this is where a well-researched business plan can save you a lot of grief, confusion, and money. If you suspect that an investor is trying to take advantage of you, he probably is.

A very common way to compensate your investor is to pay her back her initial investment plus interest. There are countless ways to structure these payments, and your investor will have her own preferences depending on how long she wants to stay involved in your business. For example, you may agree to pay back her initial $30,000 stake plus 30 percent interest, for a total of $39,000, over three years. You could plan to pay her 15 percent ($4,500) annually for the first two years and repay the $30,000 principal the third. Or you could agree to pay him $13,000 annually for three years. Whatever you decide, you must be confident that you can satisfy your investor without compromising the business or your own bottom line.

Another way to structure the investment is to offer your investor a percentage of the profits. If his $30,000 investment is worth 30 percent equity in your business, then he receives 30 percent of your profits. He may expect his return in the form of capital gains after selling his equity share to you or another partner.

Truck Tales

Capital gains are the increase in value of a share from the time of the investment to when it’s sold. This translates into profit for an investor.

As the business grows, each equity share becomes more valuable, so your investor can sell his stake for more than his initial outlay. Your compensation deal can include a buyout clause, allowing you to regain equity (and control) in your company. You can also structure your partnership so that you acquire more equity in the company incrementally over time without having to invest more cash.

Whatever you decide, it’s crucial that you not lose sight of the long-term needs of your business when considering an investment agreement. No amount of start-up capital is worth compromising your company’s future with unrealistic payments on an impossible timeline. I’m not asking you to bet against your company’s success but rather to bet in its best interest. Always make sure that the terms of your deal are consistent with the most reliable and conservative estimates of your business plan.

Finally, remember that if you have to turn down an investment deal, you’ll be able to find another source of capital. Don’t get discouraged; in business, it truly is better to be safe than sorry.

Getting a Loan

The food truck industry was already a risky business before the recession, and banks are extremely reluctant to lend money to first-time owners. Those lucky enough to get a loan are usually required to personally guarantee the note, making them responsible for the money regardless of the success or failure of their business.

What You Need to Show the Bank

I’m going to be honest; if you’re a first-time food trucker with no other small businesses under your belt, you’re going to have a very hard time being approved for a bank loan. You’ll probably need to seek private loans, a partnership, or a government-backed loan from the Small Business Administration. Applying for a loan is a critical decision that requires a lot of preparation; make sure you understand all the risks, fees, and procedures before you proceed.

Tip

If you’re looking for a partner anyway, seriously consider bringing on someone who owns or has owned a successful food truck. That credential would significantly decrease the financial risk of your venture and boost the bank’s confidence in your business plan.

The bank weighs your financial and business records, credit rating, and experience to determine your ability to repay the loan. Your business plan must be thorough and well researched, and include details of your background in the industry in order to convince them that your projected earnings are realistic.

Be prepared to demonstrate not only your experience but also how you intend to use the money you borrow. Discuss what equipment and services you’ll buy and how these investments will shape the quality and efficiency of your business. Your explanations should demonstrate to the bank that you know what you’re doing and have carefully thought out your spending plan. Banks want to invest in people who are business savvy, fiscally responsible, and qualified in their industry. Someone with a clear strategy is less of a financial risk than an unprepared first-timer just asking for cash.

The bank will also consider your equity in the company; that is, the amount of your own money you have or are prepared to invest. The bank regards this as a security deposit of sorts and an indication of your seriousness. They’ll likely review your tax returns and credit history for a general impression of your personal risk. If your credit rating is poor, your risk is high, and you’ll have to supply a qualified guarantor, who will repay the loan if you aren’t able to. The bank will also demand collateral—assets of significant value that can be seized should you default on your loan.

Ultimately, if you’re a first-time food truck owner, you’re better off seeking a partner or private investor. Once you’ve built a successful business, banks are a great resource to help you expand.

Small Business Administration Loans

If you don’t qualify for a commercial loan, your bank can help you determine whether you’re eligible for assistance from the U.S. Small Business Administration (SBA). If you qualify—and most first-time small businesses do—the SBA can guarantee your loan in full or in part, thus alleviating the bank’s risk should you default.

Your bank will help to prequalify you and prepare the necessary paperwork in accordance with SBA guidelines. This will include a business plan, your business and financial records, credit rating, equity, collateral, and experience. Even with an SBA guarantee, you’ll still be personally liable for repayment of the loan.

You may also seek venture capital from an SBA Small Business Investment Company (SBIC), which partner with private investors to provide private capital for eligible businesses. For more information on SBA assistance and guidelines, visit sba.gov.

Other Ways to Increase Liquidity

Beyond borrowing money or printing it in your basement, you have other, more creative ways to free up cash and even extend your credit.

Supplier Credit

Many food truck owners seek an unofficial line of credit from their vendors and suppliers—their purveyors, in restaurant jargon. For example, a supplier might agree to defer the payment of your bills, allowing you to use your cash for other things in the short term. Conventional wisdom dictates that new truck owners would find it difficult to persuade their purveyors to grant extended credit terms, but that’s not necessarily the case.

You’re already anticipating those first moments of interaction with your very first customer. That person will respond not just to the quality of your food and the cleverness of your design, but also to you, to your passion and authenticity and charisma. The first impressions that are so crucial in building lasting relationships with your clientele are also important to your relationships with your suppliers.

Purveyors ultimately want you to succeed because you’re a source of revenue for them. There’s nothing inappropriate about introducing yourself with a smile, wearing your passion on your sleeve, and asking them to invest in you, the same way you’d ask a bank to invest in your business. Invest in your vendor and supplier relationships the same warmth, vigor, and gratitude you will with your customers, and opportunities will become available to you.

Tip

Consider partnering with an established restaurant brand. Many times these operators are looking for ways to generate revenues but are too busy focusing on their core businesses. They may consider licensing their brand or partnering with you on a truck business. This gives you instant credibility and a following, significantly decreasing the risk of failure.

You should also consider negotiating with suppliers to get free equipment when buying other pieces from them. As you gain the confidence of your purveyors, they’ll be open to haggling, bartering, and renegotiating with you. The bottom line is that while you should never expect to receive something for nothing or on a deferred payment plan, you should never be afraid to ask.

Sponsorships

Anyone who has ever seen a sporting event has surely noticed the preponderance of flashy corporate sponsor logos. Almost any film in your local multiplex and 100 percent of the shows on television incorporate slightly less-obvious logos into their production design in exchange for capital from corporate sponsors. This allows those sponsors to build brand equity and positively associate their products with popular consumer trends.

Truck Tales

Brand equity is the commercial value of a brand based on the consumer perception of it.

Your first food truck probably isn’t going to win the sponsorship of a mega-corporation, but it doesn’t need to. You can still take advantage of sponsorship opportunities from companies that are more accessible to you. Any company that sells a product or service—and all companies do—is concerned with building brand equity. It’s time to get creative and determine what your food truck can do for them.

The easiest place to start is with your purveyors; you’re already in dialogue with them. Instead of asking for capital, offer to feature their name, product, or service in exchange for free or discounted products or services. For example, if you want to buy your produce from Farmer John’s Organics, offer to proudly state on your menu and signage that you exclusively use their organic fruits and vegetables. Print up a sample menu and sign and show it to them during your first conversation. Visual aids can be extremely persuasive.

Truck Tales

In June 2011, mega-retailer Macy’s capitalized on the food truck craze and launched Macy’s Chefs-a-Go-Go, a nationwide food truck tour that featured celebrity chefs and that received a lot of press coverage. Macy’s cleverly offered special giveaways and other truck-side deals to foodies who visited their website and social networking profiles. This gave the company a huge platform to build brand equity and remind consumers that they specialize in kitchenware as well as fashion.

You need to communicate to potential sponsors exactly why they want their product or service to be associated with your truck. Who are you? What’s your concept? What’s your company’s philosophy? Who’s your clientele? Write up a proposal and include visual aids whenever possible.

As your business grows and you build your own brand equity, sponsorship will be easier to secure. In fact, once you’re profitable, you may want to be a sponsor yourself, providing food to a local sporting event, school fair, or charity. It’s a highly effective way to leverage your relationships with other businesses and your community to attract more customers.

The Least You Need to Know