Starting a cafe – sources of funding

Along with a coffee shop business plan, you need to define your funding source(s) when opening a coffee shop. There are many options available to you, but we will talk about the most common ones.

SBA – So many sources are pushing for SBA loans, SBA loans, SBA loans! First, let me say that the Small Business Administration loan program is great if you can get approved. Even though they’ve relaxed some requirements lately, it’s still a bit difficult to get a permit.

First, the government doesn’t lend the money. The standard program is a bank loan, although there are some micro-loan programs using funds from capital groups. Most of these loans are typically collateral loans and are backed by the US government, similar to HUD and FHA home loans. This means that if you default on the loan, the government will return the bank a certain percentage of the loan amount. That’s good for the bank, and good for you if you qualify for one of these loans. They’re hard to come by, I say again, and there’s a lot of paperwork to fill out and file. They must also have good credit, very good assets, a low debt-to-income ratio, and unencumbered collateral.

Some SBA loans may take time to be approved and then funded. However, if approved, they usually have a repayment period of up to 7 years and a cheap interest rate. It’s best to speak to an approved SBA lender for specific details, since the bank is in charge and the SBA only backs the loan. You can also work with a local SBA office for more information or go to

Personal – This is the easiest form of funding, but less likely for most people. Try to put everything from your own pocket into this endeavor without ruining your marriage, family, or home. Anyway, if you get financing, you need to bring in at least 25% of the total amount you need to open your coffee shop. The more you have, the more the bank knows how serious you are, and the more likely they will fund you. You also know that the more you personally invest, the less likely you are to run when times get tough.

Money makes the world go round. Liquid funds are an excellent 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 retirement planning as a last resort. That’s what I did when I ran into capital problems and couldn’t get credit because I was maxed out. However, it is best to leave that 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 property. Interest rates are also usually cheap.

Friends and Family – If you can’t deposit as much as you need, friends and family are a great way to raise additional capital. Just make sure it’s clear how you structure the money business: are they investors, partners, both? Do you give them shares in your company? Whatever the deal, have a contract attorney draft the paperwork to make it legal. This service will cost you around $500-$1000 and when it’s done you’ll be glad you did it. Spell out all the details.

I once saw a guy invest in a restaurant and the owner just 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” and began showing up daily, scheduling meetings, remodeling the store and suggesting menu changes. It wasn’t a nice situation!

Investors – Most high-dollar investors want to see success before dumping money on someone they don’t know. However, it can happen in the beginning. You need to surround yourself with PWM: people with money. This can also be the route for friends and family. Advertisements online and in the newspaper are fine, but will most likely bring you more crazy people than real investors.

Join local business associations, speak to the economic development agencies and chambers of commerce in the areas you plan to open and ask them for investor recommendations. Many investors shy away from starting food and beverage-related businesses unless it’s a liquor store, but they’re out there.

Non-traditional lenders – aka private equity firms, capital groups – fall into this category. Their policies are less strict, but most want existing businesses to expand. They also typically don’t look for investments in the food industry because the risk is too high, and look for technology companies with a higher return. Again, this is certainly not the law.

Banks – traditional lenders, it’s difficult to get them on your side when you have NO money to step in or have marginal to bad credit and no collateral. Sometimes all it takes is a lot of work, a lot of talking, and a great coffee shop business plan to get them to help you. Having a banker by your side who believes in you and who you have developed a relationship with could be what stands between you and a funded loan. Treat her like gold.

Credit unions – usually most don’t do much in terms of business financing, but for those that do their policies are a bit more relaxed than a traditional bank, like those for personal financing, but you still need to qualify.

Credit cards – I do not recommend 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 give. You may want to have spare money in case you run into problems with one.

However, be careful because after the introductory period is over, the rate may be higher than you think if you still have a balance. If you are late, you also run the risk of receiving an interest premium. Then the credit card company increases the interest rate to the default interest rate of up to 29%! Yes, it should be illegal, but unfortunately it’s not. They can also increase the interest rate whenever they want, regardless of whether you are in default or not. It is in your agreement with them; ie the fine print. Once the price is up there, it’s very difficult to bring it back down. Chase is best known for this. Just be careful!

However, credit cards are good for purchasing when you receive the reward points or airline miles programs. I have several that I use for shopping and have received several plane tickets and thousands of dollars in gift cards to use the cards and earn points. In addition, you can effectively buy yourself more time for your Accounts Payable if you plan the settlement dates correctly.

Whatever funding source(s) you choose to start a coffee shop, make sure you know what you are dealing with. Do your research and talk to the people who can help you. Stay focused and well-informed throughout your planning stages. Make sure your prospective lender gets a copy of your coffee shop business plan. All lenders want to be sure they know what they are dealing with! Much luck.