If phrases like “peer-to-peer” and “crowdfunding” sound all too much like awkward social interactions, fear not, you’re unlikely to be alone. What’s more, these financing options don’t have to be as difficult as they sound.
The thing is, banks often take a dim view of startups and small businesses. If you want to open a café, start a roastery, design a new brewing device, or any other form of entrepreneurship, you may have to look to less traditional avenues.
Fortunately, a cohort of financing startups and “challenger” banks are doing their darndest to support the strivers, dreamers, and hustlers of the coffee industry. And this guide makes choosing the right option for you, both now and as you develop, as easy as can be.
Spanish Version: Emprendimiento en Café : Financiación Hecha Simple
Ready for business. Credit: Markus Spiske
Concept #1: Debt
This is an ugly but important concept – and one that entrepreneurs should understood. Putting debt into a business makes sense, if the business has the cash flow and assets to support it. Debt can empower growth when used well.
Clever finance heads have increased the sophistication of lending programmes, and with this the jargon, to the point of distraction. New consumer finance technology, however, has complexity and costs firmly in its crosshairs. Here are some options:
Peer-to-Peer Small Business Lending
A revolution in financing small businesses, peer-to-peer lending matches interested lenders, hungry for a return on their investment, to small businesses owners who want to borrow (from GBP5k to GBP1m).
Many of these assign you a credit rating to determine the rate of interest you will pay. As coffee entrepreneurs, you might have assets that can be taken as security (equipment, buildings etc.). However, if you don’t own many of your assets you may have to provide a personal guarantee. This means that if you fail to repay your loan, you will have to a personal responsibility to cover your obligation to the lenders.
- You have been trading for over 2 years
- You have generated revenue and profit
- You want to borrow for up to 5 years
- You are happy to provide security or a personal guarantee
Equipment doesn’t come cheap. Credit: Simon Wright via Flickr
Peer-to-Peer Invoice Financing
You pay up-front for your materials, yet your customers take up to 90 days to pay your invoices. This cash flow black hole can be crippling for young businesses, particularly coffee roasters and importers. Managing your working capital is vital for wholesalers; you need money from customers coming in to cover your obligations to your suppliers.
Invoice financing, or factoring, isn’t a new concept. Most of them pay 90% of your outstanding invoices on the same day that the invoices are created. Some will also offer to manage all your invoices for a fee.
- You have suppliers and customers that don’t tend to pay on receipt of goods
- You generate a lot of invoices to high-quality customers who are all but guaranteed to pay 30, 60, or 90 days down the line
- Your business generates over GBP100k of revenue per year
- You find yourself struggling for cash at certain times in the year
Invoices with no payment? Try invoice financing.
Start Up Loans
Certain banks and governments offer start up loans. These schemes are worth taking a look at, but beware – the one the UK government offers are personal loans. This means that if you default, it will have implications for your credit rating and existing financial obligations.
- You are happy to take out a personal loan in order to fund your business venture
- You don’t have a significant financing requirement
- You require finance in addition to business loans
“Challenger banks” simply means the new banks that are aiming to disrupt the big high street ones. These institutions often make it easier and more intuitive to borrow money, and tend to have slick interfaces, transparent costs, and quick turnaround times. Online-only offerings aim to keep costs down by having no high street branches.
- You’ve tried every high street bank without luck
- You want a quick turnaround time on your loan application
Planning an expansion? Make the numbers add up. Credit: Ken Teegardin via Flickr
Concept #2: Equity
There comes a time in many a startup’s life when they have to consider raising equity to turbo-charge their growth ambitions. Equity isn’t a dirty word: the investment you receive, if well-timed, can be the making of your business.
Consider a coffee roaster that receives 50k investment for 10% of their company relative to another roaster that doesn’t raise any money but keeps 100% of the equity. On the face of it, the latter company look like they will make the most money from their venture. However, if the 50k investment ends up doubling the size of the business, through sensible investment into sales, distribution, and capacity, they’ll be sitting pretty, owning 90% of a company that’s worth twice as much as the second.
Unlike debt, there are no obligations to pay back the money you have borrowed – that comes at the expense of assigning a percentage of your precious company. There are lots of traditional forms of equity investors: angel, venture capitalist, friends and family… However, new forms of equity investment are also gaining momentum.
Another somewhat mythical word, equity crowdfunding opens up your proposed investment to anyone and everyone. Investors can search through hundreds of weird and wonderful companies and invest as little as £10 in them. As for the company, they can raise any amount at a valuation signed off by the platform.
Raising money through crowdfunding is an art; many fall short, especially those companies which fail to understand how to market themselves as a business investment. Yet there are some fantastic success stories including Grind, the Shoreditch-based group of espresso and cocktail bars which raised over GBP1.3m through Crowdcube.
- You want exposure – every investor is an ambassador for your brand: why wouldn’t your investors want to sing your name from the rooftop?
- You want to grow quickly; equity investors like risk a lot more than those lending money, and would be much more likely to invest in a riskier venture
New cafés cost money to outfit and staff – but will help you grow. Credit: Takeaway via Wikipedia
You’ll find certain investors are only open to investing in certain demographics – such as the younger generation. (Full disclosure: I started my own youth investment business, Catalyst Founders, nine months ago.) These options are particular useful for those looking to start a business or who haven’t established a credit history.
- You are in your early twenties
- You are looking to start your company or expand it
There’s no need to go it alone with your startup.
Changing Needs Over Time
Your financing needs are likely to change as your startup develops. Let’s take an example of how this might apply – a young coffee entrepreneur who has recently stumbled on a great idea for scaling her fledgling roasting business, increasing distribution channels, and opening up a national distribution network. Let’s call her Rachel.
At the beginning:
In order to get her idea off the ground, Rachel needs some startup financing. Banks won’t lend, it’s likely to be too early to launch a crowdfunding campaign, and peer-to peer-financing requires her company to be trading for two years or more. She turns to:
- Youth investors
- A startup loan
Working capital for day-to-day business:
As Rachel starts to receive beans, roasting and selling through her distribution channels, she realizes that she has a pretty significant working capital problem – she has to pay up front for beans that she doesn’t receive payment on for up to 90 days. She turns to:
- Invoice financing
Expansion in the long term:
Rachel has a couple of great years, ticking along nicely and growing her business. People are starting to recognize the quality of her coffee. She’s building customers, but slowly. Simply put, she needs money to increase production, distribution, and sales. What’s more, she wants to shout the name of her company from the rooftops. She turns to:
- Peer-to-peer borrowing
- Challenger banks
Every coffee business is different, and there’s no wrong or right way to finance your business. I also recommend that you ask an accountant or financial advisor to check your accounts and advise you on risk levels prior to taking on debt or signing contracts.
Yet debt and equity are two useful ways to establish a thriving coffee business. I hope this article serves as a guide as you start to think about how to start, grow and sustain your coffee business.
Written by S. Barnett.
Perfect Daily Grind is not affiliated with any of the individuals or bodies mentioned in this article, and cannot directly endorse them.