So you’ve made the leap into café entrepreneurship, but the full extent of the capital requirements are only just starting to dawn on you. Perhaps you’ve peered into the murky depths of your savings accounts and are wondering how you will scrape together the funds to execute your coffee shop vision.
Fortunately, there are a range of café financing and loan options available – from government-backed British Business Bank loans, commercial mortgages, asset finance, through to merchant cash advances, VAT loans and revolving credit facilities.
In this blog, CoGoGo explores the full range of café financing and loan options.
Financing your coffee kingdom
Commercial mortgages (for those buying a café along with its premises)
If you’re looking to buy a café along with its premises, a commercial mortgage is typically the best option. Lenders often consider the ‘going concern’ value, which combines the business and property value. Most lenders offer a maximum loan-to-value ratio of 65-70% of the going concern value, with some offering up to 75% of the ‘bricks and mortar’ value.
Business loans (for those buying a café without the premises it trades from)
For those buying a café business without the property, a business loan is more suitable. Interest rates are generally higher, ranging from 6-12% per annum, with shorter loan terms compared to commercial mortgages. Some lenders may require security such as your home or another property, while others offer unsecured loans.
Franchise finance (for those buying into an established hospitality franchise)
Buying into an established franchise brings a host of benefits: marketing support, streamlined supply chains, and a proven business model. However, from the initial franchise fee, purchasing stock and setting up premises to ongoing operating costs, it can require a hefty amount of capital.
Franchise finance helps cover these expenses, with borrowing options typically ranging from £1,000 to £5 million. Additional security may be required.
Solving your café’s cash crunch
Operational costs have slowly been ramping up over the past couple of years – a major challenge for an industry that already operates on slim margins. Fortunately, there are various finance options to smooth over cash flow hiccups.
Merchant cash advances
Merchant cash advances function similarly to business loans. Upon application approval, you receive a lump sum deposit into your bank account. The available amount typically ranges from £3,000 to £300,000, based on your business’s financial strength and monthly card terminal revenue.
This financing option allows you to borrow against your projected future card sales. Repayments are automatically deducted as a predetermined percentage of your ongoing card transactions.
Unlike traditional business loans, merchant cash advances don’t have a fixed repayment term or interest rate. Instead, a total repayment amount is agreed upon upfront. For example, a £10,000 advance might require a total repayment of £12,000.
Revolving credit facilities
Revolving credit facilities, such as overdrafts and credit cards, offer flexible financing options for businesses. These facilities come with a pre-agreed credit limit established at the outset, and a set interest rate is charged only on the funds actually drawn. Revolving credit facilities are perfect for café owners whose working capital position is often variable.
VAT loans
Hospitality venues often face cash flow challenges due to seasonal fluctuations and slow periods, which can make timely VAT payments difficult. A short-term VAT loan offers a solution to this problem, allowing you to meet your HMRC obligations and avoid costly penalties and interest charges.
With this financing option, the lender pays your VAT bill directly to HMRC. You then repay the loan over a flexible term of 3, 6, 9, or 12 months, depending on your business needs and financial situation.
Giving your café a much-needed facelift
Development loans
If you’re looking to undertake some serious renovation or expansion work on your café, a development loan might be ideal. You may be able to borrow up to 90% of the cost of the project, repay in 6-24 months or convert to a commercial mortgage, with the property acting as security for the loan.
Asset finance
For expensive machinery and fittings like HVAC systems or big-ticket kitchen equipment, asset finance options such as hire purchase and finance leases can be beneficial.
There are three main options to choose from: finance lease, operating lease and hire purchase.
On hire purchase arrangements, the business makes regular payments over a set period, and upon completion of the contract, ownership of the asset transfers to the restaurant.
Under a finance lease arrangement, the café rents the equipment for an agreed period, typically covering most of the asset’s useful life. The business is responsible for maintenance and pays for the majority of the item’s cost over the lease term. At the end of the contract, the equipment is returned to the lessor.
And under an operating lease arrangement, equipment is rented for a shorter duration, usually less than the asset’s economic life. Operating leases may be useful for accessing up-to-date technology or equipment that may become obsolete quickly.
Full steam ahead on your café growth
Maybe you’re considering opening another branch, redeveloping your menu or brand, taking on more staff, or something else. Whatever the reason, there are lots of finance options available – from general purpose business loans through to alternative options like P2P crowdfunding.
General purpose term loans
Term loans allow businesses to borrow a predetermined amount to be repaid over a specific timeframe, known as the ‘term’. The interest rates can be either fixed or variable, with repayment periods typically ranging from six to 24 months.
Business loans, including term loans, fall into two main categories: secured loans (which require the borrower to offer collateral, such as business assets to back the loan), and unsecured loans (which don’t require collateral but may require a personal guarantee from the business owner).
Unsecured loans might be preferable if a business needs to borrow more than the value of its assets or prefers not to use assets as security. However, it’s worth noting that mainstream banks generally cap unsecured lending at around £40,000.
Crowdfunding
Also known as debt crowdfunding, Peer-to-Peer (P2P) crowdfunding involves multiple investors collectively lending money to the restaurant. The borrowed funds must be repaid with interest. This approach allows restaurants to access capital from a diverse group of lenders, often with more flexible terms than traditional bank loans.
On the equity crowdfunding model, investors provide capital in exchange for shares in the restaurant business. The value of these shares may increase if the restaurant succeeds, potentially providing a return on investment.
Some UK-headquartered P2P platforms include Qardus, Leap Lending, and Assetz Capital.
