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Are you a full-time employee dreaming of leaving your job and running your own business? Are you considering starting a coffee shop franchise? In this Q&A session for the Investor Financing Podcast, we will discuss financing options for coffee shop franchises, including leveraging your credit, income, and assets. We will also explore the possibility of obtaining financing through the Small Business Administration (SBA) and the steps involved in the process.
Exploring Coffee Shop Franchise Concepts
Louise and Mitch, a couple with a small portfolio of rental properties, are eager to start a coffee shop franchise. They have a few franchise concepts in mind, including Scooters Coffee, PJ's Coffee, and Cafe Bean. These concepts have been vetted and approved by the SBA, which makes them eligible for SBA financing. However, it's important to note that SBA approval doesn't necessarily guarantee the quality or success of a franchise.
Research and Due Diligence
Before diving deeper into the process, it's crucial to conduct thorough research and due diligence on the coffee shop franchise concepts of interest. The Franchise Disclosure Document (FDD) plays a vital role in this process. The FDD provides information about the number of open units, the growth rate, and the closure rate of units, among other key points. By analyzing the FDD and visiting existing franchises, you can gain insights into the potential success of the franchise in your area.
Identifying Financing Options
Louise and Mitch want to leverage their credit and assets to finance their coffee shop franchise. SBA financing is an attractive option as it allows for higher leverage. Finding a concept approved for SBA financing is the first step. Working with an SBA-preferred lender, such as a bank or credit union, is essential in this process. The lender can guide you through the financing options available.
Determining Total Project Cost
Once you've identified a franchise concept and its financing options, it's crucial to determine the total project cost. The FDD provides details on the various costs involved, such as build-out costs, marketing expenses, and royalty fees. Additionally, you'll need to consider rent costs and build-out expenses specific to the franchise's location. Having a clear understanding of the total project cost will help you plan your financing strategy effectively.
SBA Financing and Collateral
SBA financing typically allows for up to 90% financing of the total project cost. However, some lenders may require a minimum equity injection of 10%, resulting in 80-85% financing. The interest rate for SBA loans is usually based on the Wall Street Journal prime rate, with a margin added. In cases where there is a collateral shortfall, additional collateral, such as rental properties, may be required to secure the loan.
Alternative Financing Options
While SBA financing is advantageous, especially for coffee shop franchise concepts with higher costs, there are alternative financing options available. Equipment finance companies may provide financing for the equipment and a significant portion of the build-out expenses. Exploring these options and understanding their terms can help you make an informed decision about your financing strategy.
Conclusion
Starting a coffee shop franchise can be an exciting venture, but it requires careful consideration and planning. By researching different franchise concepts, analyzing the FDD, and understanding financing options, you can make informed decisions along the way. Leveraging SBA financing, in particular, can provide you with the necessary funds to turn your coffee shop franchise dream into a reality. Remember to work closely with an SBA-preferred lender to navigate the financing process successfully.
If you're interested in exploring financing options and discussing your real estate investing goals in more detail, you can book a free strategy call with Beau.