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What Do Lenders Look for If You Want to Buy a Coffee Shop

Our funding partner, Rangewell, takes you through the key factors in securing a loan to buy a coffee shop.

Coffee shops are booming, and a shop in the right location can help you make real profits. But before you can buy your very own coffee shop, you will need to find the finance.

So where can you find the money to get your coffee shop business off the ground?

How much will you need?

The main expense will be purchasing or leasing a property in a viable location with kitchen space and a dining area large enough to make the venture profitable.

The costs will depend on location, size and standard of your shop. Things might be little easier if you find an existing business such as a café or coffee shop to refurbish and take over.

How the costs mount up

Property costs may be the first hurdle. These will vary on your location, but unless you already own a property they are likely to be high.

You’ll need a till with Visa, AMEX and Mastercard facilities, and touch payment. This may result in an ongoing cost -  credit card companies charge approximately 2.5 to 5% for every transaction.

You’ll need professional support from your accountant and solicitor.

Then there are the equipment costs:

Espresso and bar equipment             £5,000 - £10,000

Dishwasher                                        £1,000 - £2,500

Microwave, range, oven                     £2,000 - £10,000

Flooring and decoration                     £2,000 - £15,000

Seating and tables                             £3,000 -£10,000

Air conditioning                                  £3,000 -£5000

Crockery                                             £250 - £1,000

Insurance                                             £1000- £1500

Stock                                                 £1,000 - £3,000

Marketing                                           £1000 - £2,000

plus staff costs, deposit, rent, business rates, etc.

How to keep your costs down

You may be able to keep costs down a little. Second-hand restaurant furniture and equipment is easy to find at auction houses and secondhand/preloved websites.

Leasing expensive equipment such as stock control and till systems, coffee machines, and other food preparation equipment, instead of buying them from the outset can also cut your costs.

Whilst it may seem to cost more in the long run, you are paying monthly and so can absorb the costs in overheads. Rental agreements will include regular servicing and repair and even replacement in some cases.

But the fact remains, if you are to open your coffee shop, you probably don’t have enough cash stashed away. You need finance.

Fortunately, there are plenty of sources of business finance you can consider. There are lenders who specialise in the sector, understand the challenges and opportunities it presents and could be your best bet for raising the funds you need.

But what are the factors they will look at when they consider your loan application?

Your credit history

Lenders don’t like risk. If they see that you or any business you’ve previously run has defaulted on loans, they won’t say yes to a new application.

Late, missed payments or even disputed payments can damage your credit score, making a decision to say yes less likely.

So, before you start your application run a credit check. Online services like  Experian may offer free credit checks. If you can show the bank a strong credit score, those assessing your application are more likely to view you favourably. If you have not got an existing business, your personal credit rating can help.

Your business plan

The business plan is your key to unlocking the funds you need. It needs to be detailed. Simply saying that you need £100,000 to buy and develop a business is just a headline – you need to show where all the costs are coming from, broken down to show every detail from your first six months lease to buying in coffee cups.

Being professional about how you will spend the money means showing contingencies – how much you need if sales are below expectation, as well as the optimistic view. You need to make provision for failure as well as success.

Support your basic budget with financial projections, a profit and loss (P&L) statement and a cash flow forecast.  A business-like approach to figures suggests a better run business – and that makes your proposition much more attractive to lenders.

Make sure you get your accountant to go through the figures in your plan. The lender will look at your proposal much more positively if it has been professionally checked.

Your experience

It is not essential that you hold any qualifications to run a coffee shop – but a little experience can go a long way.  If you do have experience of running a similar business, or at the very least managed one, it makes your application look much more realistic. The lender will have reason to believe that your business plan is based in reality.

If you don’t have experience, it may not be the end of the world. But it would do no harm to spend some time behind a counter, and taking courses on general business skills such as bookkeeping, advertising and financial planning as well as catering and hygiene.

But it has to be said; there really is no substitute for the actual experience if you are considering opening one!

Your security

No lender is likely to advance you all the money you need to open a business. They will want you to invest your own money to prove that you are serious about your new venture, and being able to put up 10%-20% of the sum required will help your application.

The lender will probably also require security or collateral. This is property they can take and sell if you cannot make the repayment on a loan. For a business loan on a coffee shop, this could be the premises, if you own them, and any assets in the business – but these may not be enough to provide the level of security the lender will need.

You can only borrow an amount less than the value of the security you provide – you can’t get a £100,000 loan with security worth £75,000, for instance. You may have to put up your home as security.

Your location

Getting the right location is essential for a coffee shop. You need a location with plenty of passing trade.

Being on a busy high street can be ideal, and if you are close to a station or a major shopping mall it could be even better.

Take some time to scout out the area at different times of the day. Seeing things from a customer’s point of view gives you a good idea of whether your coffee shop would be in the right place to succeed.

Of course, the large coffee chains – Costa and Starbucks are probably already in the area. This could simply mean that there are plenty of potential customers in the vicinity, on the lookout for a new coffee bar with something extra to offer.

Your lender will look closely at your location as part of their decision-making process. They will probably have experts in the catering business who will be able to predict the level of business your new coffee shop should be expected to attract.

Your vision

There are many types of business, all of which can call themselves a coffee shop. There is the stop for bikers and truck drivers that could be a good business close to an A road. Then there is the kind of designer coffee shop with speciality teas, designer coffees and expensive snacks that can thrive in a fashionable city environment.

The lender will want to understand your business plans, and want to know that your thinking matches the location. If your vision brings something new and exciting to an established business format, don’t be afraid to show it.

‘Yes’ is only the beginning

If you can find a lender who can agree to offer a loan, you could be in business. But remember, Lending can be expensive, and with some lenders you could be paying more than you need to

Lending decisions - and interest rates - are based on risk. The more you can reduce the risk to the lender, the better the chances of getting the funds you want, and at a lower rate.

So be sure to look at ways to reduce that risk. The more of your own money you can put in, the smaller the risk to the lender, and the better your business plan the more chance you have of securing a better rate.

Don’t be afraid to negotiate, and always shop around. If one lender has to say no, another could still say yes – and a third could offer the loan you want for less.

Get some help

There are many hundreds of lenders on the market, and knowing which to approach can save you valuable time, as well as increasing your chances of success.

A lending broker – such as our partner Rangewell could provide the help you need, and their service is free.

Richard Mitchell

About the author

Richard is one of the members of the Rangewell content team. Richard has worked with international banks as well as fintech business, and now researches and writes all types of content for financial and business readers

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