Financing the Dream

[13 Bean]

Hello everybody;

My wife and I have been kicking around the idea of opening a coffee house for the last eight months or so. We recently attended Coffee Fest and have since kicked our research into high gear. We''re developing a business plan, learning about coffee and tea, checking out the local competition, etc.

I''m sure I''ll come up with a lot of questions for you all (as I can see many in my situation have before), but for now I''m interested in the bottom line:

Money.

Not making it, mind you. I haven''t quite gotten to that part yet. I''m talking about putting together the funds to open up a business. I know what a lot of the common advice is; I''m most not going to find a bank loan or a government grant. Opening a business on credit cards is inadvisable (like I could come up with a $250-300k credit line anyway). I know there are loans through the SBA. I know I should develop a business plan and get it in front of an angel investor or a venture capital firm.

I guess I''m interested in the real world practicalities of it all. For those of you who are current coffee retailers, would you mind sharing stories of your startup days with me? Where did the money come from? (How much, if you don''t mind me asking?)

How realistic is it that I''ll find an investor as a suburban guy without many connections?

Thanks in advance, I''ve greatly enjoyed my time poking around the boards so far. 8)

 

[John P]

13 Bean,

beg, borrow,... (uhhh.. don't steal) :wink:

I would stay away from "Investors"-- unless it's family. The only way a reputable investor would have an interest is if you have a proven track record, otherwise you will at best be looking at 30% of profits plus interest on the 'loan' and perhaps a percentage of the company--or some combination thereof. Money (cash) from yourself (or from someone who loves you) first--usually 30-40% of the total, and then a SBA loan or an equity loan/second mortgage, etc. To paraphrase an often cited rule: "If you are not willing to take on significant risk, why should anyone else?"
Money really doesn't fall from trees, and I'm sure you know that, but for the benefit of others, the bulk of the money is going to come from yourself unless you have a proven track record in business, or you are an established expert in the field, etc. Starting a business is hard work, and it 's all the 'jumping through hoops' that will be a good indicator if you can make it or not.

 

[woc]

I would NEVER recommend 'family' money. If this business fails, which statically it very well could; do you really what to lose your parents or brothers money? You will have to deal with that every family event for the rest of your life. And the old adage, “Never do business with friends or family because in the end you will have neither.” Finally the best reason for not using family money is not matter what percentage of total money invested, your parents/brother/sister’s ideas about what you need to do at the café had better happen or else.

If you take on partners make sure that they are silent, minority share holders; you should always control at least 51%. Otherwise it is no longer your café, you just work there. Bank money is the best money, if you lose it, it is just another business deal done bad and you still get to enjoy the family Christmas. You will have to use some of your own money but use as much ‘other’ (non family/friends) peoples money as you can. If you can not get money from a bank and/or SBA you may want to double check your ideas and plans.

 

[Jackson]

The easiest way to get access to an SBA loan is through a major bank. The small business administration helps secure business loans by securing a large portion of the loan. If you needed $100,000.00 for your new business, and you were able to contribute 15% or $15,000.00, the SBA might back you on the remaining $85,000.00. How do you obtain an SBA loan?

1. Have a realistic business plan.
2. Have at least 15% to 20% of total cash needed.
3. Have a resume with at least 5 years in the industry.
4. No outstanding taxes owed to the Federal Government.
5. No defaulted student loans with the Federal Government.
6. Apply early enough in the SBA fiscal year, to assure maximum funds available by SBA.

Most banks that offer SBA loans are willing to lend money because if you defalt on the loan, the SBA will pay off the loan. If you were to try and borrow money directly from the SBA, you will need to fill out more paperwork than you will want to deal with. Plus, it may take over 6 months to get approved.

 

[John P]

All initial business loans, SBA or otherwise, need to be 75-100% collateralized--depending.
So if you borrow 100K, a certain percentage needs to be for equipment, furnishings, etc, and what their depreciated value will be, as well as they expect you to have additional cash/savings/stocks/etc. on hand so it is evident you are not using ALL your resources--that would just be bad business.

As mentioned. Good business plan. Make it realistic, you'll thank yourself later. Be able to adapt the plan to changing locations based on rent, traffic flow, customer base, etc. Develop a good relationship with your banker/lender and they can walk you through the steps.
a lot of info at
http://sba.gov/smallbusinessplanner/index.html

 

[13 Bean]

Thanks for your thoughts, everyone.

From what I've read so far, I was given the impression that it's very unlikely a startup business can obtain a bank loan even with the help of the SBA (High risk for the bank compared to the expected return on investment, etc). Bias of the authors or outdated information perhaps.

Anyway, that's what I needed to hear. I'd hate to invest too much of myself into this only to find that I need a winning lotto ticket to actually be able to move forward.

 

[ElPugDiablo]

Here is my take on SBA loan. I got into this business by buying a existing coffee shop. I financed 20% of the purchasing price with my own money and rest was financed by an SBA loan. A lot of banks have SBA loan, but the decision making process differs from bank to bank. I talked to and was rejected by many banks, but eventually a small out of town bank that is interested in establish a foothold in my town lent me the money. I was lucky in that the lending officer has a entrepreneurial streak in him. Other than the coffee shop I put up no collateral such as real estate, stocks and bonds as I had none. I got the loan strictly on my business plan and my good look . One thing I think that was in my favor is that I bought a very profitable business with proven numbers from tax returns. The bank was able to use actual numbers to calculate their risk. Also the lending officer visited the shop multiple times and can see long line for himself.

So my suggestion is instead of building a new shop, search for established and PROFITABLE shop that is for sale. Evaluate it properly, don't over pay, and if you can show net cash flow is more than enough to cover your expenses and loan payments, you will have a chance to get your SBA loan.

 

[AJPRATT]

I would love to purchase an existing shop, but (sigh) except for Starbucks there is nothing here. I think this is a completely untapped market. Thanks for the info on the SBA programs. We are working with the SBDC to get our business up and running. So you offered so great insight!

 

[pectopah]

Along the same track...what about working capital?

I'm thinking that SBA loans will be my savior. If the only loan I needed were for my startup costs, I think I could swing it. However, since I'm hoping to have a year's working capital on hand, working capital is the lion's share of the money I'll need. Does the same "you'll need 15-20% invested of your own money..." stand true for working capital? What about credit lines?

How have others handled this hurdle?

 

[AJPRATT]

I would check out www.sba.gov and see. If you do a /(your state abbreviation), it'll give you more specific info. There are loans with SBA that only require 10% down. There are different programs and yes, the banks are ALL different. I tell two banks the exact same thing; one bank laughs at me and the other says, "Yeah, I think we can make this work." You never know. There is also CIT Small Business Lending, which someone referred me to. Sounds like they do some "non-traditional" types of loans. Good Luck!

ElPugDiablo: When you say "coffee shop", was it a coffee business like a coffee bar or a coffee shop that served breakfast/lunch items? I'm only asking because I have an opportunity to purchase an existing coffee shop that does breakfast and lunch.

 

[AJPRATT]

Just wondering how you have made out?

We are expecting our loan committment package today!

 

[Repoman77]

I would NEVER recommend 'family' money. If this business fails, which statically it very well could; do you really what to lose your parents or brothers money? You will have to deal with that every family event for the rest of your life. And the old adage, “Never do business with friends or family because in the end you will have neither.” Finally the best reason for not using family money is not matter what percentage of total money invested, your parents/brother/sister’s ideas about what you need to do at the café had better happen or else.

If borrowing from familly keep it very formal.

just my .02 cents worth