Starting a food truck business can be a costly adventure, especially if you don’t have the financial backing to kickstart and maintain this startup. Between your food truck, permit fees, kitchen supplies, and licensing, food truck costs can add up quickly. Revenue based financing gives you the financial backing to get you started without tapping into your savings.
Capital is a necessity for mobile food truck owners looking to expand their business. However, it becomes incredibly difficult to grow the business without the funding to inject into the business. This post provides a comprehensive overview of revenue based financing and how to use it to scale your food truck business.
What is Revenue Based Financing?
Revenue based financing is a form of loan that you agree to pay back to the lender over time with a promise of a portion of the business’s future revenue until you reach a fixed dollar amount. It involves the following features:
- Fixed repayment target: it has a fixed repayment target agreed upon by the financier and the borrower that may take several years to clear.
- Fixed repayment amount: most revenue based financing options have an interest amount of between 1,5 and 2.5 the principal amount. But this can be higher, depending on your agreement with the financier.
- Flexible repayment periods: unlike other loans, revue-based funding options have very flexible repayment periods that allow you to pay back the amount agreed upon sooner if possible or later if need be.
- No loss of equity: you don’t have to sell equity or relinquish some control of your business to qualify for revenue based funding.
When To Seek Revenue Based Financing
While revenue based funding may not be the best choice for every business, it remains a viable option for some companies looking for that financial boost to kickstart their business. Before pursuing revenue based funding, consider these factors:
- The company must have an established revenue stream to back its debt service payments
- The food truck business should have a stable, established market.
- The company’s financials must be in order. You must accurately summarize the business’s revenue, debt, operating expenses, and future projections.
Before committing your food truck business to revenue based funding, we recommend considering the company’s long-term obligations. A loan is a loan and must be repaid under the agreed-upon lending terms. Therefore, while the revenue based funding option may seem to have fewer strings attached, treating it dismissively can be disastrous.
Revenue based financing appeals more to:
- Companies not looking to sell equity or guarantee a loan.
- Businesses with an already-established market
- Food truck companies looking to launch a new food product.
- Growth-stage businesses looking to hire additional staff
- Food truck companies looking to scale up their marketing campaign
Revenue-based financing is a great alternative to private equity financing and debt financing.
How to Qualify for Revenue Based Financing
Now that you have a better understanding of revenue based funding, here are some things you need to know to increase your chances of qualifying for revenue based financing:
- Demonstrate your growth potential: financiers need proof of your business’s profit margins, a healthy cash flow, and steady growth potential.
- Demonstrate the numbers work: revenue based funding and loans are worthless if repaying them cripples your business’s cash flow.
- Show how you plan to use the loan: lenders want assurance that you will use their money to grow your food truck business and work on repaying the loan interest and principal amount.
Revenue based financing is a critical yet effective way to raise your personal assets and grow your business.
Should You Consider Revenue Based Financing?
Whether you want to fund your food truck operations, buy new equipment, get another truck, or expand your already growing business, revenue based financing allows you to get the funding you need where traditional banks may not help. Starting and growing a food truck business can be very costly, especially if you don’t have enough cash flow or savings to cushion you from the expenses. Revenue based finances help make this possible. Contact our highly capable team at Legion Food Trucks for more information on food truck financing options.
