In 2019 the coffee market made an astonishing £17.7 billion in the UK and with the rise in popularity of the high street, to independent coffee shops this contribution is evident.
The UK is Europe’s fifth-largest consumer of coffee and this boon in the industry has been a huge source of employment, creating an excess of 200,000 jobs in 2017.
The market shows no sign of slowing as the nation’s reliance on this handy bean to fuel our busy working day or to facilitate social meetups gets stronger and more prevalent, so now seems like the perfect time to open a coffee shop.
However the cost of a coffee shop startup can be anywhere between £20,000 up to £100,000, so with that in mind, in this article, we will discuss the myriad of business loans available to those looking to get involved in this exciting and profitable industry so you can make an informed choice on which is best for you.
Types of Financing Options for Coffee Shops
Bank Loans
The most conventional and reliable line of credit for existing coffee shop owners, banks offer the lowest interest rates as well as the longest terms of repayment.
However a bank may require extensive records for their strict applications, sometimes reaching back 3 years into a coffee shops’ financial history, so they may be restricted to established vendors looking to expand.
Pros:
- Bank loans offer the best rates of interest of all providers (5%-8%) and because of their established reputation banks don’t include hidden fees in their terms.
- The terms of repayment are much longer than alternative providers easing the pressure on the borrower to repay their business loan.
- Tax-deductible interest.
Cons:
- The extensive requirements of the application process may prohibit prospective coffee shop startups from accessing a bank business loan.
- The future business projections for your coffee shop will be as important as its past, meaning you must have an extensive coffee shop business plan prepared and not already be indebted to previous creditors.
Alternative Loans
With a bank loan being difficult to acquire for new coffee shops alternative loans are a great way around their extensive and restrictive application processes.
Pros:
- Due to less documentation being required for an application process that generally takes place online the turnaround time on alternative loans is usually quick, often taking less than two weeks. If you’re looking to receive your coffee shop loan quickly they’re a wise option.
- A brilliant credit score and a long trailing financial history is not a prerequisite for approval.
- While a bank loan may stipulate how your coffee shop business uses your loan, alternative loans are much more flexible allowing you to take out a loan for a variety of reasons.
Cons:
- Due to alternative lenders taking less of an interest in your credit score and financial history the interest rates on these loans are much higher (8-25%). However, this will improve dependent on your previous financial performance.
- Most lenders don’t offer prepayment discounts so if you are planning to save money by returning what will be a short bridging loan they may not be the right choice for your business.
- Alternative loans have much shorter return times than bank loans which could put a strain on your coffee business.
Equipment Leasing
This form of business finance allows a coffee shop owner to lease essential equipment with little to no money down.
While some people may prefer to buy their equipment, this option allows you to acquire equipment and inventory without spending full price upfront.
There are retailers that specialise in coffee shop equipment leasing.
Pros:
- No large upfront costs and good terms of return usually spread over 2-5 years.
- If you choose to lease equipment it protects your other lines of credit while allowing you to still have the equipment essential to your coffee business.
- If you decide to pay outright for technology upfront your funds may force you to settle for a cheaper option. With equipment leasing however, the fixed interest rate and payments will allow you to purchase competitive technology without limiting cash flow.
- Tax-deductible.
Cons:
- Rates of interest (usually around 5%) mean you may end up paying more than the actual cost of the equipment over the terms of your agreement.
- You will not own the equipment under some leasing structures. This may not be an issue to those who don’t want to be tied up in the complications of ownership but it is something to consider.
- New businesses may have to pay more upfront in order to pursue an equipment lease.
Merchant cash advance
Less a business loan and more an arrangement between businesses a merchant cash advance gives a coffee business an upfront lump sum in exchange for them giving a small regular percentage cut of their debit card sales.
This system is a great option in an increasingly cashless market.
Pros:
- No fixed rates mean you are able to pay back at your own rate, if your business has a slow month you’ll pay back less, if business is thriving you will be able to pay back more.
- An MCA application is quick and access to funds between £5,000-£200,000 can be completed in moments with funds deposited within 1 week with very high approval rates for applications
- Flexible borrowing amounts and spending purposes allow you to use MCAs for whatever purpose you require.
Cons:
- The deduction from your working capital will eat into your cash flow, this may be especially evident in slower months.
- Very high-interest rates ranging from 40%-350%
What Can I Use My Coffee Shop Funding for?
Depending on the flexibility of your loan option you can use it for:
- Technology such as coffee machines
- Inventory including cups, white goods, and coffee.
- Social media and website design/renovation
- Decoration and renovation
- Staff payroll
Does My Coffee Shop Qualify for Financing?
The line of finance you choose will determine your qualifications. Bank loans require much higher levels of credit and financial history but equipment leasing or MCAs will entail fewer constraints.
What You Will Need to Apply for Coffee Shop Financing
Bank business loans require extensive paperwork, including credit history, tax records, payroll, and a solid prospective business plan.
MCAs, alternative loans, and equipment leasing may require a credit check or proof of financial history and personal details but your approval for these business loans will have less take in these factors.
How to Apply for Coffee Shop Financing
For a bank loan, you will need to organise a meeting with your local business loan advisor to begin the application process which will incur the provision of the required documentation.
The other options for finance listed above generally only require the completion of an online form, email correspondence, or a phone call.
Can I Get Financing for My Coffee Shop If I Have a Bad Credit Rating?
Some finance providers will allow you to take out a line of credit with a low credit score, sometimes as low as 650, but if you have a poor credit rating taking out further finance may not be advisable when considering the future ease of running your business.
Who Offers Coffee Shop Financing
You will struggle to get financing from a bank if your enterprise is not established but it is possible.
There are also a variety of alternative lenders that will extend finance for various ventures, including coffee shops.
Which Coffee Shop Financing Option Is Right for You
This depends on your requirements. If you need flexibility for your loan an alternative lender or an MCA provider will give you total flexibility for spending money on your coffee shop concept in the short or long term.
If you have an established business and are looking to open other premises a bank loan may be more suitable, or if you require new equipment then equipment leasing may be the best option for you.
Final Thoughts
The coffee industry is showing no sign of slowing down and the demand for fresh and exciting coffee shop ideas has never been higher. As the consumer market becomes more discerning coffee shop concepts must elevate and match the ever-more intelligent market, doing so will require extra financial assistance.
If you are looking to embark on this exciting business adventure there are a host of finance options available in order to make it more accessible.
When considering seed capital or bridging loan options, it’s essential to perform extensive research to find the absolute best option to suit your personal requirements.
FAQs
How soon will I receive my coffee shop business loan?
A bank loan may take between 2-4 weeks to deposit, while alternative loans or MCAs can clear in 1-5 business days.
Do I have to pay back a government grant?
You do not have to pay back a government grant.
What is the difference between a secured and unsecured business loan?
A secured loan must be leveraged against either physical or financial assets and entails lower interest rates but is less dependent on credit scores.
An unsecured loan incurs higher interest rates and is more reliant on a good credit score but does not require collateral.
Can I take out a personal loan to fund my coffee shop?
It is very unlikely that a provider will allow a personal loan for business requirements due to banks’ stringent requirements.