If you own a coffee shop, you may discover that operational costs surpass your expectations. Beyond the initial costs, you need enough cash for operating expenses and working capital to keep you afloat.
It’s a steep hill to climb unless you have the funds readily available. And we’re not talking a few thousand here. Primary expenses can be massive, even for a small coffee shop. Your working capital will have to cover rent, utilities, and supplies. Oh, and salaries as well.
Financing any small business involves money (tons of it) and a strong constitution. Luckily, you have choices. A business loan helps set you up for success.
Types of Business Loans for Coffee Shops
Coffee shop owners are spoiled for choice when applying for a business loan. SBA loans, term loans, equipment financing, business lines of credit, and merchant cash advances are a few popular options.
SBA Loans
The Small Business Administration’s small business loans offer a flexible line of credit. The lump sum can be used for business operations or scaling. Banks, credit unions, and digital lenders provide different packages, so it’s crucial to know which one suits you.
SBAs are designed specifically for fledgling entrepreneurs. The lender either issues a lump sum or a line of credit. As a borrower, you pay the full amount over a specified period with interest. Loan terms and interest rates depend on the lender, loan type, and amount, and your credit score.
Here’s where things get a bit murky. The latest from Investopedia is that new SBA lending rules may raise borrowing costs and make it harder to qualify, due to stricter regulations from the Trump Administration.
Term Loans
Many small business owners prefer to take this route. Term loans are a large sum of money borrowed from financial institutions or digital lenders and repaid over a fixed period. With predictable payment terms, you won’t be caught off guard. You can spend the cash on renovations, equipment upgrades, or expansion.
However, as with an SBA, your business’s creditworthiness, cash flow, and profitability are deciding factors when determining the loan term, interest rate, and payment schedule. Short-term loans are repaid within 18 months, while long-term loans range from one to five years.
If you’re in a rush, digital lenders often process applications within 24 hours and fund within days, often with better rates than banks.
Equipment Financing
Equipment financing is exactly what the term implies. This financing method enables coffee shop owners to obtain essential gear like espresso machines and fridges without paying upfront. You can use the loans or leases to spread the cost over time.
You can start by determining your equipment needs, explore financing options, and secure funds. Once you have financing, you can start using the equipment and repay the loan according to the agreed-upon terms.
The wonderful thing about equipment loans is that they are self-secured, meaning they are secured by the equipment being purchased. Lenders might be more flexible with credit scores or business histories. Keep in mind that equipment leases and sale-leasebacks can be used to finance your gear as well.
And because the equipment backs the financing as collateral, it helps you get approved for funding and possibly a lower interest rate. For equipment financing, decide between a loan (to own) or a lease (for newer equipment). Then evaluate lenders, their requirements, terms, and fees to find the right option.
Business Line of Credit
With a business line of credit, coffee shop owners have flexible access to funds up to a set limit. You only pay interest on the amount used – ideal for cash flow, short-term costs, or equipment upgrades.
There are a few advantages worth mentioning. Business lines of credit offer flexibility; you can borrow what you need when you need it, but within your credit limit. Cash flow management is made easier as it can cover unexpected expenses and revenue fluctuations. The most attractive aspect is that you only pay interest on the amount borrowed.
Banking institutions usually offer a business line of credit. Still, they have stricter terms and conditions than other lenders like digital lenders. Lines of credit can also be obtained from credit unions, which have competitive rates and personalized services. Digital lenders are a good option as they have flexible requirements and faster approval times.
Merchant Cash Advance
A merchant cash advance (MCA) provides fast funding by trading a lump sum for a share of future card sales. It’s useful for covering inventory, equipment, or unexpected expenses.
Different from a conventional bank loan, an MCA is an advance on future debit and credit sales. Repayment is made through a fixed percentage of your daily or weekly card sales. These installments adjust with sales, a standard practice for businesses with fluctuating income.
If you need urgent access to cash, MCAs can be approved within days. And unlike some loans, no collateral is required. It’s a rapid solution with a repayment structure that aligns with your sales.
Key Steps to Securing a Coffee Shop Business Loan
Securing a business loan requires a bit of admin. However, don’t let that dissuade you from applying. Once you have a business plan and the necessary documentation, you can explore different lenders and their offers.
Define Your Financing Needs
Before anything else, determine your funding requirements. Your startup costs must include everything, from equipment to inventory to operating permits. Operational expenses encompass rent, utilities, salaries, and insurance. Working capital is defined as having cash on hand to cover the initial costs before your coffee shop turns a profit.
Analyze Your Credit Profile
You can get your credit report from the three major credit bureaus (Equifax, Experian, and TransUnion). Review each report. Check for accuracy and flag any discrepancies or potential errors. Your credit score can be sourced from your credit card issuer, lenders, or via credit score services.
Prepare Documentation
Lenders assess your risks and your ability to repay the loans. For this, they require documentation tied to your business’s financial situation, legal structure, and ownership. You’ll also have to provide personal financial information.
Shop Lenders
Define your needs, check eligibility, and compare lenders (banks, credit unions, and online options). Explore SBA loans, equipment financing, and other types. Then gather the supporting documents, apply, and review the terms before accepting.
Apply and Compare Offers
Weigh the pros and cons, interest rate, and repayment period. For example, an MCA lender might advance you a lump sum. It’s fast cash. Nonetheless, it could be costly for a small business, plus the frequent repayments might create cash flow problems.
Frequently Asked Questions (FAQs)
What’s the best type of loan to start a coffee shop?
SBA loans, equipment financing, and business line of credit are all flexible options. However, online lenders are ideal for a coffee shop as they have fast approval rates and minimal requirements.
How much can I borrow to open or expand a coffee shop?
That depends on you and the type of financing you’re after. The maximum for an SBA loan is about $5 million, while equipment financing can offer up to $250K.
What documents are required for a coffee shop loan application?
You’ll need a coffee shop business plan, a loan application form, business licences and permits, identification, personal and business credit records, profit and loss statements, tax returns, and lease agreements.
Can I get a business loan if my coffee shop is a small one?
Many lenders and programs are designed specifically to help small businesses get started or grow, even if you’re operating a modest cafe or just starting.
How quickly can I get funding for my coffee shop?
The fastest funding is via online lenders or fintech platforms. They take 24 hours to seven days to pay out funds.
Brew Your Dream Cafe
Coffee shop owners don’t have the courtesy of time. Whether opening your first cafe or expanding to a second location, there are flexible business loans designed to fit your vision and your budget.
Turn Your Coffee Shop into a Daily Grind
At Fast Business Financial, we help coffee shop owners get the funding they need without the long wait.
We’ve got you covered with fast approvals and flexible terms.