There is something very dreamy about being the proprietor of a coffee shop or cafe. But you know that it takes a lot of hard work—and a lot of capital—to open a coffee shop and get it running, and sometimes you need a business loan for coffee shops to finance everything. Depending on what you’re hoping to spend on, you’ll likely be able to find a business loan for your cafe that helps you achieve what you’re hoping to.
Whether you’re hoping to open a new storefront, expand to an additional location, buy a new drum roaster, or purchase that expensive-but-so-worth-it lot of rare green coffee from your supplier, you can find a business loan to suit your purpose.
We’ll go through the major options for business loans for cafes and coffee shops, along with some scenarios in which they’re useful.
The good news if you’re looking for a business loan for a coffee shop is that you have options.
You don’t even have to be profitable to get approval. Rather, what lenders are looking for are stats including your credit score and your business’s cash flow, which reveal your past history with paying off debts and how likely you will be able to pay off your loan, respectively. It takes a while to get a business—especially a coffee shop—to profitability. And, luckily, lenders know that.
So, you can look to apply for a term loan with a lot of flexibility. But, if your credit is not as strong, or you don’t have a lot of business history under your proverbial belt, you can go another direction. For instance, getting a business loan for cafe equipment specifically.
With that in mind, let’s go through the options. This isn’t exhaustive on the types of business loans you can get for cafes and coffee shops, but there’s likely to be something in this list that’ll address your capital needs:
The SBA loan is considered the gold standard of business loans—and that’s for a reason. These loans are issued by lenders, usually small banks, but guaranteed up to 85% by the U.S. Small Business Administration. That means that in the case of a borrower’s default, the lender has a lower risk. And the great news is that they pass that on to you.
SBA loans lead the pack in terms of their funding amounts (up to $5.5 million), term length (up to 25 years), and rates (basically the lowest available). It’s the ideal situation for a coffee shop owner. Of course, you’ll have to be able to qualify for these loans, which require very strong credit (generally 680+) as well as several years in business, plus good revenue and financials.
SBA 7(a) loans—the most popular program—enables borrowers quite a lot of flexibility with how they spend their cash. You can refinance old debt, spend as working capital, etc. But say you’re looking to buy a building for your coffee shop. You might want to look into an SBA 504/CDC loan, which is meant specifically for buying large fixed assets, including commercial real estate. This is the second-most popular program with small business owners.
Many of the best coffee shops really give back to their communities, offering programming, education, charity work, and more. If that sounds like you, you might also be a candidate for an SBA microloan. These loans only go up to $50,000, but they’re meant for newer businesses with less established history. They’re also often awarded to businesses that make an impact on their communities, serve underserved populations, or are run by women or veterans.
The other important thing to know about SBA loans is that these loans take quite a bit of time and effort to get your hands on them. Translation? No quick fix here. But they’re worth the work to apply if you believe you’re qualified, because with their business-owner-friendly terms, SBA loans are hard to beat.
If you’re loving the idea of an SBA 7(a) loan, but you know that you don’t quite have the financial qualifications that you need to find approval, don’t worry. You may still qualify for term loans, which are what you think of as “traditional” business loans, probably—a lump sum deposited into your business bank account for you to use as flexible working capital.
It is worth noting that some business term loans do require you to have time-in-business history. But say you’re looking to open up a new coffee shop as a second business, or need capital to open a second location? A term loan could very much work for you.
Another general benefit to term loans, especially medium-term loans, is that different lenders have different repayment structures. So, if you’re looking to make monthly payments instead of weekly, for instance, you might be able to find a lender with terms that suit you best.
There’s no way around the fact that coffee shops require equipment, big and small, to keep things going. Cups and plates, definitely; chairs, tables, and couches; sound systems; espresso machines and brewers; dishwashers—we know you know.
If you don’t need the flexibility of general working capital because you know you simply need the money to buy that La Pavoni you’ve been dreaming about, you might be better served by equipment financing. With this type of business loan for cafe supplies, you’ll get a quote from your vendor and present it to the potential lender, who’ll then give you the capital to make your purchase once you’re approved.
There are many nice things about equipment loans, especially that they’re slightly easier to obtain than term loans. But equipment financing is also what’s called “self-collateralizing,” which means that the supplies you purchase with the money serve as the collateral for the loan in the case of default. If you’re unable to pay, the lender will repossess that La Pavoni, for example—but you generally do not have to put up additional collateral.
You can also find fast approval for these coffee shop loans, so if, say, your refrigerator breaks, you may be able to get pretty quick approval for the capital to replace it.
Maybe you don’t need to make quite as big of a purchase as that espresso machine or fridge. Let’s say that you need a dozen new tables, or all new dishware. It’s more money than you want to put on a business credit card.
This is an instance in which a business line of credit can really help. In many ways, it’s like a business credit card in that you have a line of credit to spend against, but it also has characteristics of a traditional term loan wherein you apply to a lender to get approval. Then, you can have the business line of credit ready when you want to “draw” from it, aka spend against it. But, unlike other traditional loans, you only have to pay interest on what you use.
Many coffee shop owners like the flexibility of this kind of business loan. It’s great for emergency purchasing, but also for seizing opportunities for which you need capital (like that once-in-a-lifetime, deeply discounted Probat roaster currently on sale from your competitor who just went out of business).
Maybe you owe your green supplier money, but you don’t have the cash on hand to do it. Funny enough, that event you catered last month whom you’re waiting on your payments from? They’re in the same situation and can’t pay you.
If your cash flow is spotty and you have invoices outstanding, you can choose invoice financing to bridge the gap for you. With this type of coffee shop financing, you work with a lender to front you up to 85% of the outstanding invoice, and when your finally receive payment, the lender will give you the remaining 15%, minus their fees. It’s not ideal to give up any piece of a payment, no, but it’s often worth it if you need liquidity.
Let’s get this out of the way: Merchant cash advance financing is one of the more expensive kinds of coffee shop business loans. But if you need help quickly, and your credit isn’t strong, this type of financing enables you to access cash in exchange for a percentage of your daily credit- and debit-card sales.
However, many coffee shops and cafes are very dependent on credit cards—some are even cashless now. So, if you make a large percentage of your daily revenue, and can afford a slight daily deduction from your cash flow, a merchant cash advance is an option for a short-term loan.
We’ve been discussing debt-based financing, which is obviously different than equity-based financing. These are options in which you take on debt that you repay at a premium, but you don’t give up any of your ownership of your cafe.
On the other hand, you do have the option to consider something like angel financing. With taking on an investor, you’ll give up a bit of ownership in your coffee shop, but you don’t have to take on debt.
Speaking candidly, this isn’t an option for most entrepreneurs—regardless of the business they own. It’s hard to find investors! But if you think that someone in your community would be excited about injecting cash into your business, or if you have a novel idea for your business model (like a coffee shop-laundromat hybrid—that really exists!), you might be able to onboard an investor.
Remember that, when you’re working with an investor, you’ll have someone who will be interested in your financials, and often want to advise you. Accountability is a big piece of partnering with an investor. And, sometimes, it’s great to have someone else with skin in the game. But it’s a change in the way you might be used to working, so be sure to consider that.
Above all, remember that it’s important to match the why to the how in coffee shop business financing—meaning that you need to understand why you’re seeking money in order to figure out how to get it. Not every type of business loan can provide you capital for what you’re hoping to fund.
The speed with which you need money and effort you have to put together an application are both factors as well as your own personal creditworthiness. Make sure you review your own profile as a candidate to make sure your expectations are aligned with the reality of small business financing. Then, it’ll be much easier to match your goals to the type of financing that’s not only a fit for you as an entrepreneur, but also right for your business.
But, as we’ve said all along, you can hit your goals—and the right tool for financing cafes and coffee shops is out there. Know your options is half the battle!
Meredith Turits is a contributing writer for Fundera.
Meredith has worked as a writer and editor for more than a decade. Drawing on her background in small business and startups, she writes on lending, business finance, and entrepreneurship for Fundera. Her writing has also appeared in the New Republic, BBC, Time Inc, The Paris Review Daily, JPMorgan Chase, and more.