How much will the bank lend me?
Australians love their coffee so it’s no surprise that many have dreamed about running their own coffee shop.
Will the bank actually support you with cafe finance?
The short answer is yes but the trick to getting approved and borrowing the amount you need means having experience, a business plan and good security.
How much can I borrow?
The lenders that we deal don’t provide unsecured cafe finance.
As a general rule:
- Cafe premises (freehold): Borrow up to 80% of the property value or up to 100% plus costs using a guarantor.
- Cafe business finance: Borrow up to 50% of the business value of an existing coffee shop.
- Borrow up to 100%: This may be possible if you have other property as security or a guarantor. Maximum loan term: 15 years.
- Maximum interest only term: 3 years.
- Equipment, invoice discounting and other business loans are available.
- Loans over $5,000,000 are assessed on a case by case basis.
- A business plan with a cash flow forecasting is required.
- 2-3 years experience in managing a cafe.
- Low doc loan and bad credit loans generally not available.
- Interest rates are negotiable depending on the strength of your situation.
We can give you provide an indicative funding approval!
Call 1300 889 743 or fill in this free assessment form to speak with one of our cafe finance specialists.
How do I get approved?
Although they’re often touted as recession-proof, cafes and coffee shops have one of the highest failure rates of any business.
Banks recognise this but are still willing to offer coffee shop loans for strong applicants.
Cafes and other food and beverage businesses can be quickly affected by poor management so if you’re planning to run the store yourself, the bank will want to see that you have a solid track record.
Generally, you’ll need around 2-3 years managerial experience along with work references that support your application.
Showing that you’ve completed courses in barista training, management and customer service will also give you a better chance of getting approved.
The easiest way to think about it is like a job interview – the bank wants to know they’re making the right investment.
Alternatively, it may be that you’re providing the finance and start-up capital while you have a friend or a relative with barista management experience to run the day to day operations.
When it comes to commercial loans, the bottom line is that your application makes sense.
Generally speaking, banks prefer cash or residential property as security but they will lend against standard commercial property as well.
On top of that, banks will usually take a fixed and floating charge or Bill of Sale over the business assets and you’ll need to provide a director’s guarantee.
Buying an existing business?
If you’re just buying the business (the going concern), the bank will lend you up to 50% of the value of the cafe which means you’ll either need to come up with the rest of funds in cash or with equity in your residential property.
You can actually borrow up to 80% of the property in equity to use for business purposes which means you could potentially borrow up to 100% of the business costs.
Buying the freehold as well?
You may sometimes see listings for coffee shops where the owner is selling both the business and the business premises (freehold).
In this case, the bank will lend up to 80% of the value of the business premises since coffeehouses are considered standard commercial properties by the banks.
So in this case, you’ll need to come up with the remaining 20% of the property value as well as the remaining 50% of the business value with cash and/or equity in a residential property.
As a general rule, the bank will want to see the vendor’s (the seller of the cafe) last 2 years balance sheets showing profit and loss as well as assets and liabilities.
They may also ask for the last 2 years Australian Taxation Office (ATO) tax portals and Business Activity Statements (BAS) to show that they’ve been meeting their tax obligations.
Essentially, the bank wants to know that you’re buying into a coffee shop with good business fundamentals so you can start earning an income.
Commercial lenders will generally want to see that the business turnover is 1.5 to 2 times the proposed interest expenses of the business loan. This is known as the ‘serviceability ratio’.
Sit down with your accountant and come up with a business plan highlighting things like:
- Cash flow forecasts.
- Who will be managing the coffeehouse and why they’re qualified.
- How many staff you will be hiring.
- SWOT analysis including local demographics and competitor research.
- Your marketing strategy.
What is a SWOT analysis?
SWOT is the acronym for strengths, weaknesses, opportunities and threats and is an important tool that accountants use when determining the viability of a business venture.
For example, a strength may be that you’re buying a lease in a location known for its boutique cafes and coffee shops.
A weakness is that you’re competing for that foot traffic with a number of local competitors.
Coming up with a unique selling point is important for any business but lenders see cafe finance applications on a regular basis so they really want to know that you can stay profitable.
Why speak to a mortgage broker?
By speaking to a mortgage broker that specialises in cafe finance, we can help you borrow up to the maximum Loan to Value Ratio (LVR) based on your situation.
Home Loan Experts has access to almost 40 lenders and strong relationships with their commercial relationship managers.
Because of this, we’re in a strong position to negotiate reduced interest rates on your behalf.
Call us on 1300 889 743 or fill in our online enquiry form today.
What if I want to fund a start-up?
We can’t help you with unsecured start-up capital finance however we can help you with an equity cash out loan.
You can use this for fit-out and/or minor renovation work as well as buying equipment.
We also have lenders that can help with ongoing business finance, whether you need:
- Equipment finance.
- Overdraft facility.
- Invoice financing.
- A bank guarantee to secure a new lease and free up much needed cash flow in those crucial first few months.
Are there government grants?
The Australian government does offer business grants but they are few and far between and they generally aren’t any available to support your start-up capital requirements.
The only exception to this is if:
- You meet certain requirements: This includes grants for Aboriginal and Torres Strait Islanders
- You work in a particular industry: This includes energy and waste recycling or you’re involved in heritage projects.
However, there are grants available if you’re already operating and want to expand including hiring and training new staff.
Check out the grants and assistance finder on the business.gov.au website for more information.
What does the cafe industry look like?
It’s hard to escape Australia’s coffee culture.
Some economic reports have even found that the cafe and coffee shop industry is growing at a faster rate than the overall Australian economy!
However, it’s important to understand that with the number of specialty cafes growing everyday and low barriers to entry, competition is fierce.
Most business owners work on a very thin profit margin so it really comes down to your passion for coffee.
Hospitality is key!
Coffee shops are very much built on repeat and referral businesses so although quick service is important, customer service is crucial.
Like buying a restaurant, cafes can quickly suffer from a bad reputation – word of mouth spreads fast.
- Entering an apprenticeship or coffee school: Even before you lay any money down to purchase a cafe, you should consider undertaking barista and customer service training including an apprenticeship at a quality coffeehouse. You should do this even if you’re not planning to run the daily operations yourself.
- Sourcing quality beans: This is a key value proposition for regular coffee drinkers.
- Inviting business premises: More than many other types of businesses, you need to make a statement with your business premises, whether the fit-out is warm and ambient or completely unique in its own way.
Get your professional team together
When considering the purchase of a cafe, the first thing you should be doing is surrounding yourself with a team of professionals.
- A buyers agent: A commercial buyers agent can help you find cafes that are for sale and in your price range. They can even negotiate on price on your behalf.
- An accountant: They can help you analyse the financials of the business and identify opportunities and weaknesses. You’ll soon get an idea of why the cafe is being sold in the first place. Beware of vendors that refuse to provide key financials.
- A solicitor: They will go through the Heads of Agreement (contract of sale) with you to make sure that it’s in your best interests. This includes helping you to understand your rights and responsibilities for property repairs and maintenance. You may want to make it a condition of sale that certain repairs be undertaken by the vendor.
Is a short term lease better?
Generally speaking, you should try to avoid locking in for more than 1 to 2 years.
Let’s just say you sign up for a 5 year lease term. If your business fails within that time, you’ll still be liable to pay the rent and you could be sued by the landlord for defaulting.
If the building or retail space is only available with a long term lease (more than a year or two) really consider whether you have the ability to run a successful venture.
Longer leases do provide stability so it allows you to firmly establish your business in town and protects you from having to move in case the landlord decides to sell the premises.
Do you qualify for cafe finance?
Call 1300 889 743 to speak with one of our experienced commercial mortgage brokers or simply fill it our free assessment form and we’ll get back to you soon.