Opening a cafeteria – Funding sources

In addition to having a coffee shop business plan, you need to 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 pushing SBA loans, SBA LOANS, SBA LOANS! Let me first say that the Small Business Administration loan program is awesome, if you can get approved. Although they have recently relaxed some of the requirements, it is still a bit difficult to get approved.

First of all, 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 collateral loans and are backed by the US government in a similar way to HUD and FHA mortgage loans. What that means is that if you were to default on the loan, the government will reimburse 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 may take a while to be approved and then funded, but if you are 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 specifics, since the bank makes the decisions, the SBA only underwrites the loan. You can also work with a local SBA office for details or visit

Personal – This is the easiest form of financing, but less likely for most people. Try to put as much as you can into this business out of your own pocket without ruining your marriage, your family, or endangering your home. If you get funding, you will be required to put up at least 25% of the total you need to start your cafe anyway. The more you have, the more the bank will know how serious you are and the more likely they are to fund 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.

Real Estate 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 put up 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 they 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 is ready you will be glad you did. Explain all the details.

I once saw a guy invest in a restaurant 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 started showing up every day, scheduling meetings, wanting to reorganize the store and making suggestions to change the menu. That was not a pleasant situation!

Investors: Most high-value investors want to see success before putting up cash with 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 real investors.

Join local business organizations, talk to Economic Development Corporations and chambers of commerce in the areas you want to open, and ask for investor references. Many investors avoid planting food and beverage related businesses unless it is a liquor 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 to look to expand. Nor do they 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, they are difficult to get on your side if you have NO money to kick or marginal bad credit, and no collateral. Sometimes a lot of work, a lot of conversations and an amazing business plan for a coffee shop may be what you need to help you. A banker on your side who believes in you and with whom you have established a relationship could be the thing that stands between you and a financed loan. Treat them like gold.

Credit Unions: Most generally don’t do much when it comes to business financing, but for those that do, their guidelines are a bit more relaxed than a traditional bank, like personal financing, but still you will 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 offered by some banks. 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, your rate may go higher than you think if you still have a balance. Also, if you are late once, you risk having your fare 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 you are in default or not. It is in your agreement with them; that is, the fine print. Once the rate goes up, it is very difficult to go 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 miles programs. I have several that I use to shop and I got 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 if you plan your billing dates correctly.

So no matter what 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 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.

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