In addition to having a coffee shop business plan, you should have your funding sources defined when starting a coffee shop. There are many options available to you, but we will talk about the most common ones.
SBA – So many sources push for SBA loans, SBA LOANS, SBA LOANS! Let me first say that the Small Business Administration loan program is amazing, if you can get approved. Although they have relaxed some of the requirements lately, it is still a bit difficult to get approved.
First, the government does not lend the money. The standard program is a bank loan, although there are some microcredit programs available that use funds from capital groups. Most of these loans are typically collateralized loans and are backed by the US government in a similar way to HUD and FHA home loans. What that means is that if you were to default on the loan, the government will repay the bank a certain percentage of the loan amount. That’s good for the bank and good for you if you can qualify for one of these loans. They are hard to come by, I repeat, and there is a lot of paperwork to fill out and file. You must also have good credit, very good assets, a low debt-to-income ratio, and lien-free collateral.
Some SBA loans can take some time to get approved and then funded, but if approved, they generally have a repayment period of up to 7 years and a favorable interest rate. It’s best to talk to an SBA-approved lender for particular details, since the bank makes the decisions, the SBA only backs the loan. You can also work with a local SBA office for details or visit http://www.sba.gov
Personal – This is the easiest form of funding, but the least 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 putting your home in jeopardy. If you get funding, you’ll be required to contribute at least 25% of the total you need to start your cafeteria anyway. 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 in person, the less likely you are to run when times get tough.
Cash is king. Liquid assets are a great source of financing. Liquid assets are assets that can be quickly converted to cash, such as stocks, bonds, or a 401(k). I only recommend any retirement plan as financing as a last resort. This is what I did when I ran into capital problems and couldn’t get a loan because I was maxed out. However, it is better to leave this money alone and look for other options.
Home Equity – This is a good source of financing if you have enough equity in your home or other real estate. Interest rates are usually favorable as well.
Friends and Family – If you can’t provide everything you need, friends and family are a good way to raise additional capital. Just make sure it’s clear how you structure the money deal: are you investors, partners, both? Are you issuing them shares in your corporation? Whatever the deal, get a lawyer hired to draw up the paperwork to make it legal. It will cost you around $500-1000 for this service and when it’s done you’ll be glad you did. Explain all the details.
I saw a guy invest in a restaurant once and the owner just wanted a loan, so they had a payment plan but no written contract stating what was what. The investor assumed that he was now a ‘partner’, as co-owner and began showing up every day, scheduling meetings, wanting to reorganize the store and making suggestions for changing the menu. That was not a pleasant situation!
Investors: Most high-value investors want to see success before they put any cash into someone they don’t know. However, it can happen at first. You need to surround yourself with PWM: People with Money. This can also be the route of friends and family. Online and newspaper ads are fine, but they will most likely bring you more weirdos than actual 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 references. Many investors avoid seeding food and beverage related businesses unless it’s a liquor establishment, but they’re out there.
Non-traditional lenders, also known as private equity firms, equity groups fall into this category. Their guidelines are less stringent, but again, most want existing businesses looking to expand. They also do not usually look for investments in the food industry because the risk is too high and they look for technology-type companies that have a higher return. However, this again is certainly not the law.
Banks: traditional lenders, are hard to get on your side if you have NO money to kick around or marginal to bad credit, and no collateral. Sometimes a lot of work, a lot of talking, and an amazing coffee shop business plan might just be what you need to get them going. A banker on your side who believes in you and with whom you have built a relationship could be what stands between you and a financed loan. Treat them like gold.
Credit Unions – Most generally don’t do much in the way of business financing, but for those that do, their guidelines are a little more relaxed than a traditional bank, like for personal financing, but you’ll still have to qualify.
Credit cards – I am not recommending this option! If you use them, make sure they have a very low interest rate, even 0% with some of the introductory rates some banks offer. You may want to have a cash backup in case you run into trouble with one.
Be careful though, once the introductory period is over, the rate may go higher than you think if you still have a balance. Also, if you are late once, you risk having your fee stolen. That’s when the credit card company raises the interest rate to the default rate, up to 29%! Yes, it should be illegal, but unfortunately for us, it’s not. They can also increase the rate whenever they want, regardless of whether or not you are delinquent. It is in your agreement with them; that is, the fine print. Once the rate goes up, it’s very hard to bring it back down. Chase is most famous for this. Just be careful!
However, credit cards are good to buy if you get rewards points or airline mileage programs. I have several that I use to shop and have gotten several plane tickets and thousands of dollars in gift cards for using the cards and earning points. On top of that, you can effectively buy more time for your accounts payable by planning your billing dates correctly.
So, whatever funding source(s) you choose to start a coffee shop, make 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 regarding your planning stages. Make sure your potential lender gets a copy of your coffee shop’s business plan. All lenders will want to make sure you know what you’re dealing with! Good luck.
