The coffee industry is changing and booming every year. The US coffee industry market grows to the $45.5 billion in 2018. With such increase in demand for coffee, it is projected that this number will grow to over 40,000 by 2023.
The coffee shops aren’t just serving brewed happiness, but also creating a community to socialize and interact. The have become places where people fall in love, meet up, conduct corporate meetings, catch up with friends, or go on a first date. Not to mention, the WiFi revolution has made them a great destination for remote workers and students to connect and study.
Gone are the days when you visit a coffee shop just to get a coffee and a muffin. The induction of latte art, single-origin pour-overs, acai bowls, or even grilled sandwiches, have become standard meals at the most happening coffee shop in towns.
The high demand for coffee shops has created worthwhile opportunities for local business owners to start a business. Effective management and operations can even make you the hottest destination in the neighborhood. To be that hottest coffee shop in town, you need planning and research on how to build a successful coffee shop, and more importantly, evaluate how you’ll fund it.
Whether you’re just starting, or expanding, or need to buy that fancy coffee makers, you can get a small business loan to suit your intend. In this article, we’ll walk you through the major small business loan options for your coffee shop.
Why you need capital for your Coffee Shop?
- To Market: Marketing your coffee shop is essentials. Since mostly can be done free via online communities and social media, there are other pricey requisites as well like signage, visual appeal, loyalty programs and coupons.
- To Expand: You need expansion or renovation being it the essential to attract new customers, and it requires capital. Having an appealing, friendly set up with a large seating space is essential for a coffee shop business to grow.
- Buy Equipment: Getting financing can help when you need to buy new coffee equipment. The demand is on the rise for coffee, so you need to ensure you have the latest equipment to serve the quality products.
- Purchase Inventory: Increased demand for espresso means you need to stock up your inventory especially during the peak seasons.
- Additional Overhead: You might have to add some costs in form of a security system and insurance to protect your investment at some point.
Small Business Loan Options for Coffee Shops
You will have a variety of loan options for your coffee shop. Most lenders don’t require you to be profitable, they take into account your credit history and business’s cash flow. It takes time to make a coffee shop profitable, and luckily, lenders understand that.
SBA loans are considered the best small business loan options especially for startup coffee shops. These loans are issued the by small banks, but guaranteed up to 85% by the U.S. Small Business Administration (SBA). This place less risk on the lenders in case the borrowers default on the loan.
SBA loans offer the best loan combination in terms of loan amounts (up to $5.5 million), term length (up to 25 years), and rates (lowest available). The qualification criteria for SBA loans is little difficult which involves strong credit score of 680+ with several years in business, plus good business revenues and financials. These loans also takes time and effort to get your hands on them but worth a try because they are hard to beat in terms of the loan combination they offer.
SBA offers multiple loan programs including SBA 7(a) loans, 504 CDC loan, microloan etc. If you need to refinance an old debt or need working capital, SBA 7(a) loans offers you the flexibility to spend the money the way you like. If you need to buy real estate for your coffee shop, consider SBA 504/CDC loan. These loans are explicitly for buying large assets, including commercial real estate.
You can also qualify for an SBA microloan if you’re a startup with low credit score and give back to your community by offering education, charity work, serving underserved, minorities or veterans and more.
If you’re unable to qualify for SBA loans, you may still qualify for term loans. These are basically “traditional” business loans, with a lump sum cash for you to use as flexible working capital.
The best thing about some terms loans is that they don’t require a good credit score and time in business. If you’re looking to open a new coffee shop, or a second location, a term loan will works best for you. Another benefit of medium-term loans is that they have flexible repayment structures. Its up to you whether to make monthly payments or weekly.
Every coffee shop need equipment upgrades to keep coffee serving. This includes buying new crockery, furniture, espresso machines and brewers, refrigerators, Ovens, toasters, dishwashers etc. Your café supplies needs can be served with equipment financing. In equipment financing scenario, you present the equipment quote to the potential lender, who’ll then approved the money so you can make your purchase.
These loans are quicker and easier to qualify as compared to term loans. These loans are called “self-collateralizing,” loans which means the equipment you purchase will be used as collateral for the loan in the case of default.
Business Line of Credit
If you don’t want to make a big purchase and only need a dozen of mixers, some furniture, for instance, a business line of credit can help. A line of credit works similar to a business credit card in many ways, where you have a credit line to spend against, but have characteristics of a term loan wherein you need to get approval from a lender. These lines of credit are different from traditional loans, where you only pay interest on the amount you use. This provides flexibility to coffee shop owners especially in case of emergency purchasing.
With irregular cash flow and outstanding invoices, get benefit from the invoice financing option to fill the cash flow gap. In this coffee shop financing option, the lender pay you upfront up to 85% of the outstanding invoice, and will give you the remaining 15% minus their fees when your finally receive the payment. Laying off any payment is not ideal, but sometime brings value especially when you need cash flow.
Merchant Cash Advance
Merchant cash advance (MCA) is the quickest and expensive type of coffee shop financing. If you need quick cash with bad credit score, a cash advance allows you to get the capital in exchange for a fixed percentage of your future credit/debit card sales. Since most coffee shops works on credit cards now and if you can make a large percentage of your daily income, and can bear daily deduction, a merchant cash advance is the best option for a short-term funding.
Documents needed for a Coffee Shop Loan:
- Coffee shop tax returns
- Coffee shop income statements
- Coffee shop balance sheets
- List of coffee shop debts
- Coffee shop owners personal tax returns
- Bank statements (proof of coffee shop’s cash flow)
The Bottom Line
The bottom line is before opening a coffee shop, you need to understand why you need the money in order to evaluate how you get it. How early you need money and the effort you made along with your personal creditworthiness all contributes to your loan application. You need to ensure your expectations are realistic are in line with the small business loan options. This will helps you to match your expectations with the right financing type that will help you grow.
At Merchant Advisors, we provide coffee shop financing so you can grow your business without hassle. Apply for a small business loan today and find out how much money you can qualify for coffee shop financing. There is absolutely no cost and obligation and it is free to apply!