coffee shop

How to Start and Fund a Coffee Shop

Latest posts by Chris Motola (see all)

Coffee shops are a hot commodity, with a market value estimated at over $45 billion. America runs on caffeine, which all but ensures a demand for the product. Not only that, but a coffee shop can have an enormous impact on the feel of a neighborhood, serving as a gathering place and a makeshift office for telecommuters looking to get out of their homes.

Potential is all well and good, but if it were easy to open a coffee shop, everyone would be an entrepreneur.

So, what does it take to start a coffee shop? Let’s take a look.

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A business plan

I know, just about every business “how to” article starts with an obligatory call to make a business plan. There’s a good reason for this, though. A business plan serves not only as a way to structure your business goals and strategy, it’s also a pitch to prospective funders.

A business plan is an outline of what your business is, what it does, how it runs, what it will cost and how you intend for it to grow.

Most business plans will have the following sections:

  • Executive summary: A brief summary of your plan, your business and your prospective market.
  • Company description: Presents details about your company, including location, size, mission statement, legal structure and management.
  • Market overview: An analysis of your potential customer base and their behaviors, as well as your competition.
  • Sales and marketing strategy: A plan for how to apply the information you outlined in the market overview.
  • Operating plan: Discusses the resources and assets your business will need in order to function.
  • Organization and management team: Discusses skills and organization structure necessary to succeed. If you’re in a partnership, you’ll want to discuss who owns and is responsible for what.
  • Financials: A forward-thinking analysis of profits, losses and cash flow.

Startup costs

Your startup costs will, of course, find their way into your business plan. Coffee shops all have some costs in common: equipment, supplies, rent, utilities and labor (assuming you’re not running it by yourself).

That said, there’s quite a bit of potential variability here.

Is your coffee shop mainly for commuters who will just spend a few minutes there and leave? Or is it designed as a gathering space where people will hang out and, hopefully, make multiple purchases throughout the day? Are you serving foot traffic, or do you need a drive-thru?

It’s safe to assume that more space will cost more money in any market, but a lack of space could potentially constrain your sales volume. As a general rule, you don’t want to spend more than 15 percent of your sales on rent.

For supplies, consider the market you’re serving. Are they expecting a premium product for which they’re willing to pay top dollar? Or are they looking for their daily coffee pit-stop at a minimal price point? Remember who you’re competing with, as well as who your target customers are.

For equipment, you’ll want to account for not only the upfront costs, but the lifespan of the equipment you’re buying. It may be possible to save on costs upfront, only to have to replace something in a year or two. If you’re leasing the equipment, you’ll also want to take into account how quickly it depreciates in value in order to choose the most appropriate type of financing.

With labor costs, remember you’re not just paying salary, but payroll taxes, benefits and processing fees. And even if you’re working as a solopreneur for now, you’ll want to pay yourself (eventually).

Registering your business

This part can be ridiculously simple or fairly complex, depending on the path you take. When you create your business you are, by default, creating a sole proprietorship or, if you’re starting it with a partner, a partnership.

At the very least, you’ll want to file a DBA (doing business as) with your local county clerk, which will allow you to do business under a name other than your own. In the case of a partnership, each partner is assumed to have equal equity and liability unless otherwise stated. This is far from the safest option, however. In terms of liability, there is little distinction between your business and you as an individual.

Incorporation grants you some protection by creating legal distinctions between you and the business you run. In a limited liability corporation (LLC), you still report your earnings and losses on your personal taxes, but you are granted some legal protections from collections and lawsuits. LLC responsibilities and costs vary from state to state. Incorporating as a C-corp or S-corp further distinguishes you from your business, but also comes with structural and tax obligations. The corporation is taxed separately and treated as a distinct “person.”

Ideally, you’ll want to sit down with a lawyer and/or CPA to figure out the best option for your ambitions.

Getting insurance

State and local laws may determine what insurance you’re required to carry, but given the number of things that can go wrong with a coffee shop, it’s worth considering your insurance options regardless.

Of particular interest to coffee shop owners might be general liability insurance, which protects you from lawsuits or accidents such as, say, those that can be caused by handling hot liquids. You may also want to consider workers’ compensation insurance for the same reason.

Seeking business funding

You’ll, of course, need money to get your coffee shop going. The good news is, this can come from a variety of different funding sources:

  • Personal savings: Hopefully you’ve been saving up for a rainy day.
  • Your support network: Your friends or family may be able to give you a better deal on a loan than a lender.
  • Credit cards: For purchases you can pay off quickly, credit cards may be a viable option. Just don’t get stuck paying interest.
  • Loans: Getting a lender as a new business can be challenging, but segments of the alternative market do cater to them. You may also qualify for certain SBA programs.
  • Grants: These tend to be highly competitive, but check with your state and municipality to see if you qualify for any. They are “free” money, after all.

Choosing the right software

Running a cash-only coffee shop may sound appealing to the frugal business owner, but you’ll miss out on sales if you can’t process credit and debit cards. To that end, you’ll want to invest in point of sale (PoS) software that will allow you to securely take and process cards.

You may also find it helpful to automate some of your inventory tracking to make sure you don’t, for example, run out of creamers during the morning rush.

You’ll probably also want to consider accounting software for keeping track of expenses and revenue.

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Getting the word out

Picking a good location for your shop and employing word-of-mouth marketing will always help your business get noticed, but it probably wouldn’t hurt to let people in the broader community know about your new business, either.

Create an attractive website that makes your coffee shop look appealing and welcoming. If you’re not much of a coder, you can either contract the job out or use a site builder. Read up a bit on SEO to make sure you website will show up in search engine results for local coffee shops through localized marketing.

You’ll want to also consider using social media to build brand recognition and reach your target audience.

Get brewing

Starting a business, even a humble coffee shop, is a major undertaking, but with a solid strategy, you can break it down into more manageable chunks.

With any luck, you’ll soon be a cornerstone of your local neighborhood.

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