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. We have put together a series of articles that will help you get past this hurdle and better understand what financing you will need (such as getting a business loan), as well as the various avenues you can use to get it.
In our last article we discussed a few different types of financing for different stages of your mobile food vending business’ growth and have an idea of how much capital you will need, and how this financing works. In this article we will cover a primary source of business financing many mobile vendors have used, the business loan.
Getting A Business Loan
If you decide on getting a business loan for your food truck or cart from a bank or other lending institution, there are several things to consider. Start by asking yourself these questions…
- For what, exactly, is the loan going to be used? (reference part 1 of this series)
- What length should the loan be?
- What assets can you use as collateral?
When answering these questions, especially the first one, be specific. Are you going to buy a truck or cart with the loan? Are you going to use it to purchase a kitchen to have installed on a truck you already own? You need to think through these things because you want to make sure you get a loan that fits the use of the money.
For instance, you don’t want to finance your start up supplies for your business for 15 years if you’ll be using them up within your first six months of operation, and you wouldn’t want to finance the full funding of your truck with a one-year loan. Make sure your loan type and length fits what you’re using the funds for so you’re not paying interest on items that are long gone.
Now lets look at ways to help your chances of getting a business loan.
Helping Your Loan Chances
In today’s recessionary time, banks are skeptical about lending money for start-ups. They like to see a couple of years of profitability before they dole out cash. They will require some form of collateral such as vehicles, buildings, real estate, or other hard assets. Lenders aren’t interested in the potential of your business, only your business’s ability to pay off the loan. They call this asset-backed borrowing, and you can actually use many things to back your loan. For example, you can use the equity in your home, or even your children’s college fund.
Another option is to have someone cosign the loan or credit-line for you. You may have a friend or relative that doesn’t necessarily have the money to invest in your company, but would feel comfortable enough to cosign. Just make sure that person have a good credit record. You may also be able to find someone who will cosign for a small fee. Check with your legal or financial advisors.
Speak with the SBA
The Small Business Administration (SBA) can also help you get a loan for your new mobile food vending business. The SBA is a U.S. government agency that backs and guarantees loans made by banks to small businesses. The backing by the SBA gives the local lender a higher level of confidence in the likelihood of collecting on your loan. With less risk, they are more likely to approve the loan. In the event you default on your loan, the SBA has guaranteed the lender that the SBA will pay up to 90% of loan back itself.
The guaranteed percentage depends on the type and the amount of the loan The SBA offers many types of loans, including loans for veterans, equipment and facility updates for pollution control, and many other business situations that affect local economies and communities. As a small business owner seeking a loan, you are required to also personally guarantee the loan. Your business must also qualify as a small business. By the SBA’s standard, most businesses in the United States are considered small.
Although most prospective vendors don’t need huge amounts of capital to start up operations, with a standard SBA-backed loan, you can borrow up to $2 million; however, the SBA will only guarantee the first $1 million. If your loan is $150,000 or less, the SBA will guarantee 85%. If the loan is for more than $150,000, then they’ll guarantee 75% of it.
The drawbacks of going through the SBA are the large amounts of paperwork and time delays that the approval process usually takes. Expect the process to take several months. The SBA Express is a new option offered by the SBA. It provides a 36-hour approval process for loans up to $150,000. It only guarantees up to 50% of the loan, however. Lenders can also approve unsecured lines of credit for up to $25,000 under this program.
Microloans are another option backed by the SBA. These loans are small — maxing out at $35,000. The average amount of a microloan is about $10,500. The maximum term for the loan is six years. The SBA will forward your loan application to your local SBA-approved lender, and the final credit decision is made by the local lender. In this type of loan program, the lender is required to provide you (the borrower) with business training and technical support. In fact, the lender may even require the training as part of the loan application process. You may have some difficulty finding lenders who participate in microloan programs simply because of the small profit in it for them; but if it meets your needs, it’s definitely worth a shot.
The SBA offers many other loan programs that aren’t mentioned here. Visit the SBA.gov for more information, as well as a listing of your local SBA-approved lenders. Most local lenders have SBA experts on staff, so you can begin the loan process directly with them.
Some Final Business Loan Tips
Every bank and every banker will have a slightly different idea of what to look for when deciding whether or not to lend you money. They will all, of course, look at your financial projections and credit history, but their perception of your character is also a very critical factor. It may take many visits to many banks and many different bankers to actually find one that will take a chance on your business. So, don’t give up on getting a business loan too soon!
When you start the process of visiting banks, do the following:
- Call first to make an appointment.
- Dress for success.
- Have a well-prepared business plan and all financial documents with you.
- Be professional.
- Be overly prepared to answer questions. This includes everything related to your business, your credit history, and your financial status.
- Show extreme confidence.
- Be very “matter-of-fact” and present an air of not being desperate for the money.
- Be truthful about everything (they’re going to find out anyway).
- Don’t spend your time “selling” your business idea (they don’t care).
- Keep in mind that they only want to know how they’re going to get their money (and interest) back out of you.
- The larger your own financial investment in the company is, the better your chance of getting the loan.