In addition to having a cafe business plan, you need to define your funding source(s) when starting a cafe. There are many options available to you, but we will cover the most common ones.
SBA – So many sources are pushing SBA loans, SBA LOANS, SBA LOANS! First let me say that the Small Business Administration loan program is great, if you can get approved. Although they have relaxed some of the requirements lately, it is still a bit difficult to get approved.
First of all, the government does not lend the money. The standard program is a bank loan, although there are micro-loan programs available that use funds from capital groups. Most of these loans are normally secured loans, and they are backed by the US government like HUD and FHA home loans. This means that if you default on the loan, the government will repay the bank a certain percentage of the loan amount. It’s good for the bank and good for you if you can qualify for one of these loans. They are hard to get, I repeat, 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 unencumbered collateral.
Some SBA loans can take a while to be approved and then funded, but if you are approved they usually have a repayment period of up to 7 years and a favorable interest rate. It is best to speak to an SBA approved lender for specific details, as the bank decides, the SBA only guarantees the loan. You can also work with a local SBA office for more details or go to http://www.sba.gov
Personal – This is the simplest form of funding, but less likely for most people. Try to put everything you can into this business out of your own pocket without ruining your marriage, your family, or putting your home at risk. If you get funding, you will still need to pay at least 25% of the total you need to start your cafe. The more you have, the more the bank knows how serious you are and the more likely they are to finance you. They also know that the more you have personally, the less likely you are to run when times get tough.
Cash is king. Cash is an excellent source of financing. Liquid assets are assets that can be quickly converted into cash, such as stocks, bonds, or a 401(k). I only recommend any retirement plan as funding as a last resort. That’s what I did when I ran into capital issues and couldn’t get a loan because I was maxed out. It’s best to leave that money alone and look for other options.
Home Equity – This is a good source of financing if you have sufficient equity in your home or other real estate. Interest rates are generally favorable as well.
Friends and family – if you can’t invest as much as you need, friends and family are a good way to raise additional capital. Just make sure it’s clear how you’re structuring the financial transaction: are they investors, partners, or both? Do you issue them shares in your company? Whatever the case, have a contract lawyer draft the necessary paperwork to make it legal. It will cost you around $500-$1000 or so for this service and when done you will be glad you did. Write down all the details.
I once saw a guy invest in a restaurant and the owner only wanted a loan, so they had a repayment plan but no written contract stating what was what. The investor assumed he was a “partner” now, as a co-owner, and began showing up daily, scheduling meetings, wanting to revamp the store and making menu change suggestions. It was not a pretty situation!
Investors – most high dollar investors want to see success before giving money to someone they don’t know. However, it can happen at first. You need to surround yourself with PWM: People with Money. It can also be the route of friends and family. Online and newspaper ads are fine, but will likely get you more weirdness than real investors.
Join local business organizations, speak with economic development corporations and chambers of commerce in areas you want to open, and ask them for investor references. Many investors are hesitant to start food and beverage related businesses unless it is an alcohol establishment, but they are 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 don’t normally look for investments in the food industry because the risk is too high and look for technology-type businesses that have a higher return. However, it is certainly not the law.
Banks – traditional lenders, they are hard to get on your side if you have NO cash to inject or borderline bad credit, and no collateral. Sometimes just a lot of hard work, a lot of talking, and a great cafe business plan can be all you need to get them to help you. A banker on your side who believes in you and with whom you have established a relationship could be what stands between you and a financed loan. Treat them like gold.
Credit Unions – usually most don’t do much in terms of business financing but for those that do their guidelines are slightly more flexible than a traditional bank like those for personal financing but you will 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 that some banks offer. You may want to have a cash reserve in case you have trouble with one.
Be careful, however, because once the introductory period is over, the rate may increase more than you think if you still have a balance. Also, if you are late once, you run the risk of being rate-jacked. That’s when the credit card company raises the interest rate to the default rate, up to 29%! Yes, it should be illegal, but unfortunately for us, it is not. They can also increase the rate whenever they want, whether you are in default or not. It is in your agreement with them; i.e. the fine print. Once the rate is up there, it is very difficult to bring it down again. Chase is most famous for this. Be careful!
Credit cards are good for purchasing though, if you get the rewards points or airline mile programs. I have several that I use to buy and have gotten several plane tickets and thousands of dollars in gift cards to use the cards and get points. Plus, you can actually save more time on your accounts payable if you plan billing dates correctly.
So whatever source(s) of funding you choose to start a cafe, make sure you know what you’re up against. Do your research and talk to people who can help you. Stay focused and well-informed on your planning steps. Make sure your potential lender receives a copy of your cafe’s business plan. All lenders will want to be sure that you know what you are dealing with! Good luck.
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