For food truck owners trying to expand their mobile food business, capital is a necessity. It’s difficult to grow without funds to invest back into your business. But what happens if you’re denied a bank loan or can’t find investors? An option that just might work for vendors in need of capital is revenue based financing.

Today we’ll share what you should understand about RBF.

What You Need To Know About Revenue Based Financing

They are loans

Revenue based financing is unique because it provides vendors with growth capital in return for the financier being paid a percentage of their food truck’s future revenues.  Technically their loans, but there are no fixed payments, no set time period for repayment, and no set interest rate.

Revenue based financing works by having business owners pay a fixed percentage of their revenue, so payments are directly related to how much revenue the company makes. The loan is fully repaid when payments reach the repayment cap. The repayment cap is typically equal to 1.5 to 2.5 times the principal amount. Most revenue based lenders expect the repayment cap to be met in 4 to 5 years, but how long it takes depends on the growth and performance of the food truck.

RELATED: Financing A Food Truck In A Tough Economy

They align your success with the investor’s success

While revenue based financing investors don’t own shares of your food truck, RBF is similar to equity in that it’s in the investor’s best interest for the business to grow quickly and successfully. RBF investors have every incentive to help your mobile food business grow, by helping increase sales opportunities, or additional financing or just helpful advice.

They’re more expensive than bank loans

Banks typically charge around 6 to 9 percent interest, plus fees. Bank loans are less expensive and low-risk, they’re often difficult for food truck owners to obtain. Revenue based financing is more expensive than a bank since revenue based financing investors typically target an annual return of 15 to 30 percent.

They’re not for everyone

Food trucks with low gross margins are not suited for revenue based financing because the investors are being paid a percentage of revenue, effectively compressing gross margins even more.

Top benefits of revenue based financing

  • You need minimal credit requirements. A food truck owner needs a minimum FICO score of 550 to qualify.
  • No collateral required. Most conventional bank loans require some form of collateral, revenue based financing doesn’t.
  • Simple application process. Unlike the long and excessive amounts of information required with a traditional bank loan; a revenue based financing application is a simple one page application. The only other documentation required is the company’s past 3 month’s bank and merchant services statements.
  • Fast funding process.  Once the application is submitted, funding can take as little as 24 hours, but in most cases, 7-10 days.

RELATED: Is Owning A Food Truck Right For You?

How to qualify for RBF

Now that you know what revenue based financing is and the pro’s to applying for this type of financing, is this something you’re still interested in? If you want to pursue this type of financing to grow your food truck, here’s what you’ll need to do.

  • Demonstrate growth potential. Revenue based financing financiers want to see proof of your profit margins, growth potential and a healthy cash flow.
  • Show how you’ll use the money. If you can’t specify how you’ll use the funds, you’re not ready for revenue based financing. Lenders want assurance that you’ll use their money for growing your food truck empire.
  • Show that the numbers work. A revenue based financing loan is worthless if repaying it completely cripples your food truck’s cash flow.

The Bottom Line

Whether you’re is looking to fund your food truck operations, acquire another truck, buy new equipment, or expand into a brick and mortar location; revenue based financing offers an opportunity for food truck vendors to get the funding they need where traditional banks might not.

Have you gotten revenue based financing for your food truck business? We’d love to hear your thoughts on this topic. Share your thoughts in comment section our food truck forum or social media. Facebook | Twitter