Starting a Coffee Shop – Funding Sources

Besides having a coffee shop business plan, you need to have your funding source(s) defined when starting a coffee shop. There are many options available for you, but we will talk about the most common.

SBA – So many sources push SBA loans, SBA LOANS, SBA LOANS! Let me first say, the Small Business Administration loan program is awesome, if you can get approved. Although they have loosened up some of the requirements lately, it is still somewhat tough to get approved.

First of all, the government does not loan the money. The standard program is a bank loan though there are some micro loan programs available that use funds from capital groups. Most of these loans are normally collateral loans, and they are backed by the US government similar to HUD and FHA home loans. What that means is that if you should happen to default on the loan, the government will reimburse the bank for certain percentage of the loan amount. That is good for the bank, and good for you if you can qualify for one of these loans. They are tough to get I’ll say again, and there is a lot of paperwork to fill out and file. You also have to have good credit, very good assets, low debt to income ratio, and unencumbered collateral.

Some SBA loans can take some time to get approved and then funded, but if you are approved, they usually have up to a 7 year repayment period and a favorable interest rate. It’s best to talk to an approved SBA lender for particular details, as the bank calls the shots, the SBA only backs the loan. You can work with a local SBA office as well for details or go to

Personal – This is the easiest form of financing, but less likely for most people. Try to put all you can into this venture from your own pocket without ruining your marriage, family or jeopardizing your home. If you do get financing, you will be required to pitch in at least 25% of the total you need to start your coffee shop anyway. The more you have in, the more the bank knows how serious you are and more likely they are to fund you. They also know the more you have in personally, the less likely you are to run when the times get tough.

Cash is king. Liquid assets are a great source of funding. Liquid assets are assets that can be converted to cash quickly like stock, bonds, or a 401(k). I only recommend any retirement plan as funding as a last resort. This is what I did when I ran into capital problems and could not get a loan because I was maxed out. It’s best though to leave this money alone and search out other options.

Real estate equity – This is a good source of funding if you have enough equity in your home or another piece of real estate. The interest rates are usually favorable as well.

Friends and family – if you cannot put in as much as you need to, friends and family are a good way to raise additional capital. Just be sure it’s clear how you structure the money deal: are they investors, partners, both? Are you issuing them stock in your corporation? Whatever the deal, get a contract attorney to draft the paperwork to make it legal. It will cost you about $500-1000 or so for this service and when it’s done, you will be glad you did it. Spell out all details.

I once saw a guy invest in a restaurant and the owner wanted a loan only, so they had a repayment plan but not any written contract stating what was what. The investor assumed he was now a ‘partner’, as in part owner and started showing up daily, scheduling meetings, wanting to rearrange the store and making menu change suggestions. That was not a pretty situation!

Investors – most high dollar investors want to see success before they pony up cash to someone they do not know. However, it can happen at the beginning though. You need to surround yourself with PWM: People with Money. This can also be the friends and family route. Ads online and in the paper are ok, but will most likely bring you more weirdoes than real investors.

Join local business organizations, talk with the Economic Development Corporations and chambers of commerce in the areas you are looking to open and ask them for investor referrals. A lot of investors shy away from seeding food and beverage related businesses unless it is a liquor establishment but they are out there.

Non-traditional lenders – aka private equity firms, capital groups fall into this category. Their guidelines are less stringent but again, most want existing businesses looking to expand. They also are not normally looking for food industry investments because the risk is too high and search out tech type companies that have a higher return. However, this is again certainly not the law.

Banks – traditional lenders, they are tough ones to get on your side if you have NO money to kick in or marginal to bad credit, and no collateral. Sometimes just a lot of work, a lot of talking and an awesome coffee shop business plan may just be the thing you need to get them to help you. A banker on your side that believes in you, and you have established a relationship with could be what stands between you and a funded loan. Treat them like gold.

Credit Unions – usually most do not do much in the way of business financing, but for those that do, their guidelines are slightly more relaxed than a traditional bank, like those for personal financing but you will still have to qualify.

Credit Cards – I am not recommending this option! If you do use them, be sure they are a very low interest rate, even 0% with some of the introductory rates some banks give. You may want to have back up cash in case you run into problems with one.

Be careful, however because after the intro period is over, the rate may go higher than you think if you are still carrying a balance. Also, if you are late one time, you run the risk of getting rate-jacked. That is when the credit card company jacks the interest rate to the default rate, as high as 29%! Yes it should be illegal but unfortunately for us, it is not. They can also raise the rate whenever they want regardless if you are in default or not. It’s in your agreement with them; i.e. the fine print. Once the rate is up there, it is very difficult to get it lowered again. Chase is the most famous for this. Just be careful!

Credit cards are good for purchasing however, if you get the rewards points or airline miles programs. I have several I use for purchasing and have gotten several airline tickets and thousands of dollars in gift cards for using the cards and getting points. Besides that, you can effectively buy more time for your accounts payable if you plan the billing dates correctly.

So whatever source(s) of funding you choose for starting a coffee shop, be sure you know what you are up against. Do your research and talk to the people that can help you. Stay focused, and well informed regarding your planning stages. Be sure your prospective lender gets a copy of your coffee shop business plan. All lenders will want to be sure you know what you are up against! Good luck.