Starting a coffee shop: funding sources

In addition to having a business plan for a cafeteria, you must have your funding sources defined when starting a cafeteria. There are many options available to you, but we will talk about the most common ones.

SBA – So Many Sources Drive SBA Loans, SBA LOANS, SBA LOANS! First let me tell you that the Small Business Administration loan program is amazing, if you can get approved. Although lately they have loosened some of the requirements, it is still somewhat difficult to get approval.

First, the government does not lend the money. The standard program is a bank loan, although there are some microcredit programs available that use capital pool funds. Most of these loans are typically collateral loans and are backed by the US government, similar to HUD and FHA home loans. What that means is that if you default on the loan, the government will reimburse the bank for 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’ll say it again, 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 an unencumbered collateral.

Some SBA loans can take a while to be approved and then financed, but if approved, they generally have a repayment period of up to 7 years and a favorable interest rate. It’s best to speak with an SBA-approved lender for specifics, since the bank makes the decisions, the SBA only endorses the loan. You can also work with a local SBA office for more details or visit

Personal – This is the easiest form of financing, but least likely for most people. Try to put everything you can into this company out of your own pocket without ruining your marriage, your family, or putting your home in danger. If you get financing, you will be asked to contribute at least 25% of the total you need to start your cafeteria anyway. The more you have, the more the bank will know how serious you are and the more likely it is to fund you. They also know that the more you have personally, 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 turned into cash quickly, 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 had equity 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 also usually favorable.

Friends and Family – If you can’t contribute everything you need, friends and family are a great 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 stock to them in your corporation? Whatever the deal, get an attorney hired to draft the paperwork to make it legal. This service will cost you around $ 500-1000 or so and when it’s ready you’ll be glad you did. Explain all the details.

I once saw a man investing in a restaurant and the owner only wanted a loan, so they had a payment plan, but not a written contract stating what was what. The investor assumed he was now a ‘partner’, as a co-owner, and began attending daily, scheduling meetings, wanting to reorganize the store, and making suggestions for menu changes. That was not a pretty situation!

Investors – Most high dollar value investors want to see success before handing over cash to 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’ll 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 referrals. 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 pools fall into this category. Their guidelines are less strict, but again, most want existing companies to look to expand. Nor do they tend to seek 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 is certainly not the law.

Banks – Traditional lenders, they are hard to get on your side if you have NO money to kick or if you have marginal to bad credit and are unsecured. Sometimes just a lot of work, a lot of conversations, and an amazing coffee shop business plan may be what you need to help you out. A banker on your side who believes in you and has established a relationship with could be the one standing between you and a financed loan. Treat them like gold.

Credit Unions: Usually, most 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, such as those for personal finance, but you will still have 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 that some banks offer. You may want to have backup cash in case you have trouble with one.

However, be careful because after the introductory period is over, the rate may go up more than you think if you still have a balance. Also, if you are late once, you run the risk of having your rates increased. That’s when the credit card company raises the interest rate to the predetermined rate, as high as 29%! Yes, it should be illegal, but unfortunately for us, it is not. They can also increase the rate whenever they want, regardless of whether it is in default or not. You agree with them; that is, the fine print. Once the rate is there, it is very difficult to lower it again. Chase is most famous for this. Just be careful!

However, credit cards are good to buy, if you get reward points or airline miles programs. I have several that I use to buy and have earned multiple airline tickets and thousands of dollars in gift cards for using the cards and earning points. On top of that, you can save more time for your accounts payable by planning your billing dates correctly.

So, whatever funding source you choose to open 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 prospective lender gets a copy of your coffee shop business plan. All lenders will want to be sure that you know what you are up against! Good luck.