Starting a Coffee Shop – Funding Sources

Starting a Coffee Shop – Funding Sources

In addition to having a coffee shop business plan, you need to determine the source(s) of funding when starting a coffee shop. There are many options for you, but we will talk about the most common ones.

SBA – So many sources clamoring for SBA loans, SBA LOANS, SBA LOANS! Let me first say that the Small Business Administration loan program is great if you can get approved. Although they have relaxed some of the requirements recently, it is still a bit difficult to get approved.

First, the government does not borrow the money. The standard program is a bank loan, although there are some microloan programs available that use funds from equity groups. Most of these loans are usually secured loans and are backed by the US government, similar to HUD and FHA home loans. This means that if you happen to default on the loan, the government will reimburse the bank a certain percentage of the loan amount. It’s good for the bank and good for you if you can qualify for one of these loans. They’re hard to get, I’ll say it again, and there’s a lot of paperwork to fill out and file. You also need to have good credit, very good assets, a low debt-to-income ratio, and unencumbered collateral.

Some SBA loans may take some time to be approved and then funded, but if you are approved, they usually have up to a 7-year repayment period and a favorable interest rate. It is best to speak with an SBA approved lender for specific details as the bank decides, the SBA only supports the loan. You can also work with a local SBA office for details or go to

Personal – This is the easiest form of financing, but less likely for most people. Try to put as much as you can into this venture out of your own pocket without ruining your marriage, your family or endangering your home. If you do receive funding, you will be required to contribute at least 25% of the total amount you need to open your cafe. The more you have, the more the bank knows how serious you are and the more likely they are to finance you. They also know that the more you have personally, the less likely you are to run when times get tough.

Money is king. Liquid assets are a great source of funding. Liquid assets are assets that can be quickly converted into cash such as stocks, bonds, or a 401(k). I recommend any pension plan as funding only as a last resort. This is what I did when I got into equity trouble and couldn’t get a loan because I was maxed out. However, it is best to leave this money and look for other opportunities.

Real Estate Equity – This is a good source of financing if you have enough equity in your home or other real estate. The interest rates are usually good too.

Friends and family – if you can’t put up as much as you need, friends and family are a good way to raise additional capital. Just make sure it’s clear how you’re structuring the cash deal: are they investors, partners, both? Do you issue them stock in your corporation? Whatever the deal, get a contract lawyer to draw up the paperwork to make it legal. It will cost you around $500-1000 for this service, and when you’re done, you’ll be glad you did. Write all the details.

I once saw a guy invest in a restaurant and the owner only wanted a loan so they had a repayment plan but no written contract stating what was what. The investor assumed he was now a “partner,” as a part owner, and began showing up daily, scheduling meetings, asking to remodel the store, and making suggestions for menu changes. It was not a pretty situation!

Investors – most high dollar investors want to see success before they fork over money to someone they don’t know. However, this may happen at first. You need to surround yourself with PWM: people with money. This can also be the friends and family route. Ads online and in the newspaper are fine, but they will most likely bring you more strangers than real investors.

Join local business organizations, talk to Economic Development Corporations and Chambers of Commerce in the areas you want to open and ask them for investor referrals. Many investors shy away from starting a food and beverage business unless it’s an alcohol establishment, but they are out there.

Non-traditional lenders – also known as private equity firms, equity groups fall into this category. Their guidelines are less strict, but again, most want existing businesses looking to expand. They also typically don’t look for investments in the food industry because the risk is too high and look for technology-type companies that have higher returns. However, this is certainly not the law again.

Banks – traditional lenders, they are hard to get on your side if you DON’T have money to put down or you have extremely bad credit and no collateral. Sometimes just a lot of work, a lot of talking, and a great coffee shop business plan might be what you need to get them to help you out. A banker on your side who believes in you and with whom you have established a relationship can be what stands between you and a funded loan. Treat them like gold.

Credit unions – usually most don’t do much in the way of business financing, but for those that do, their guidelines are a bit more relaxed than traditional banks, such as personal finance, but you’ll still need to qualify.

Credit cards – I do not recommend this option! If you do use them, make sure they have a very low interest rate, even 0% with some of the introductory rates some banks give. You may want to have some spare cash in case you run into trouble with someone.

Be careful, though, because after the introductory period ends, the rate can become higher than you think if you still have a balance. Also, if you’re late once, you risk getting charged interest. This is when the credit card company raises the interest rate to the default interest rate, up to 29%! Yes, it should be illegal, but unfortunately it isn’t. They can also raise the interest rate whenever they want, whether you’re in default or not. This is in your agreement with them; i.e. the fine print. Once the rate gets up there, it’s very hard to get it down again. Chase is most famous for this. Just be careful!

However, credit cards are good to buy if you receive rewards points or airline miles programs. I have a few that I use for purchases and have received several airline tickets and thousands of dollars in gift cards for using the cards and earning points. In addition, you can effectively gain more time for your duties if you plan your billing dates correctly.

So whatever funding source(s) you choose to start a coffee shop, be sure you know what you’re up against. Do your research and talk to the people who can help you. Stay focused and well informed about planning stages. Make sure your prospective lender gets a copy of your cafe’s business plan. All lenders will want to make sure you know what you’re up against! Luck.

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