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Liquor stores can generate good profit margins and are considered largely recession-proof. But they also come with considerable expenses — such as inventory, payroll, rent, and security systems. Fortunately, there are a number of loan options that can help you get you the funding you need to start or grow your wine and spirits business.

Which type of liquor store loan will work best for you will depend on how much money you want to borrow, how you want to use the funds, and how soon you need the money. Here’s what you need to know to find, and apply for, a liquor store loan.

What Are Liquor Store Loans?

There is no formal designation for liquor store business loans. However, there are a number of small business loans that liquor store owners can use to purchase inventory, do renovations, pay employees, buy real estate, invest in marketing, and more.

These include the SBA 7(a) loan, short- or long-term loans from banks and online lenders, business lines of credit, commercial mortgages, and merchant cash advances. If you also own (or you’re looking to purchase) a bar, there are even loans for bar owners.

How Do Liquor Store Loans Work?

Liquor store loans work like any other kind of small business loan. Typically, they provide you with a lump sum of cash that can be used for a variety of purposes. You borrow the money at an agreed-upon interest rate and repay it over time until the loan is paid off, which could be anywhere from a few months to 25 years.

When a lender is assessing if you are eligible for a liquor store loan and how much they are willing to lend to your business, they typically consider several different factors, including your revenues, time in business, plan for using the borrowed funds, available collateral, along with your business and personal credit scores.

Recommended: Free Credit Score Monitoring

Types of Liquor Store Financing

Knowing what type of small business loan you need is the first step to getting a loan for your liquor store. These options can help your business cover common expenses, expand a business, or acquire an existing store.

Business Term Loans

Small business term loans let you borrow a set amount of money that’s paid back with interest on a predetermined schedule, which could be months or many years. They are available from banks, credit unions, and online lenders.

One of the best term loan options for a liquor store loan is an SBA loan, such as the 7(a) program. These loans are backed by the U.S. Small Business Administration (SBA) and come with favorable terms — low rates, high amounts, and long payback periods. But, you’ll need excellent credit to qualify. You may also need to prove that you have a liquor license or that you will be able to get one.

If you don’t qualify for an SBA term loan, you may want to look into a short- or long-term loan from an online lender. These tend to be quicker and easier to qualify for than SBA and traditional bank loans, but typically come with higher interest rates and fees.

Equipment Financing

If you want to purchase equipment for your store, such as a point-of-sale system, display fixtures, or a computer, you may want to look into an equipment loan. With this type of small business financing, you typically get a quote for the equipment or asset you’d like to buy, and a lender will front you a significant portion of the cost. The asset you purchase with the loan acts as collateral for the loan.

Business Line of Credit

Not all loans for liquor stores provide a lump sum of cash up front. With a business line of credit, you’re given access to cash up to a pre-approved maximum. You can take out however much you need up to the limit, repay it, and then borrow it again. This can help relieve temporary cash flow issues or help you seize an unexpected opportunity. You only pay interest on the amount you use.

Commercial Real Estate Financing

Rather than lease retail space, you might decide to purchase property for your liquor store. Or, if you already own your liquor store, you may be looking to refinance your existing mortgage. For either of these scenarios, you’ll want to consider a commercial real estate loan. Because the property you’re buying (or refinancing) serves as collateral for the loan, you may be able to get low interest and a long repayment term.

Merchant Cash Advance

A merchant cash advance (MCA) isn’t technically a loan, but rather an advance on future liquor sales. With an MCA, you sell your future revenue at a discount to a merchant cash advance company. To collect their money, the advance provider will usually deduct a percentage of your daily credit and debit card sales. This can be a quick way to access a lump sum of cash, but tends to be more costly than other types of financing.

Business Acquisition Loans

If you’re looking to buy an existing liquor store or acquire a competitor, a business acquisition loan may be a good option. This is a loan that’s given to a small business specifically to acquire another business. You may be able to qualify for a good rate if the target liquor store’s assets provide enough collateral to cover the loan. You’ll want to keep in mind, however, that you can only use a business acquisition loan for a short window of time and only for the agreed upon purpose.

4 Steps to Getting a Liquor Store Loan

To get the best and most affordable financing for your liquor store, you’ll want to start exploring and comparing your small business loan options. Here are the steps involved.

1. Finding Out What Kind of Loan You Want

We’ve explored all types of business loans you can use for your liquor store, so now it’s time to narrow it down. A good first step is to look at your personal and business credit, as well as your annual revenues, to determine what type of financing you might qualify for. If your credit and financials are strong, you may be able to get a low-interest SBA term loan, which can be used for a variety of purposes.

If your finances aren’t strong, you might consider an online term loan or a merchant cash advance. If you have a very specific use for the funds, such as purchasing equipment or buying a retail space, you may want to look into getting a targeted loan, like an equipment loan or a commercial real estate loan.

2. Determining How Much of a Loan You Need

Once you know how you want to use the loan, you’ll want to create a budget to get a sense of how much you will need to achieve your goal. As you run the numbers, it can be a good idea to add some extra padding to your budget to account for unanticipated setbacks or expenses.

When considering loan size, you’ll also want to make sure you can afford to make the monthly loan payments. Borrowing a million dollars to overhaul your business may sound fabulous, but what happens when that large payment is due? Not being able to make your payments puts you at risk of defaulting on the loan and could jeopardize your liquor store.

3. Gathering Documents

When you apply for your loan, the lender will want some documents about your business. These may include:

•  Tax returns

•  Financial statements (such as profit and loss statements and bank account statements for the business and business owners)

•  Corporation or LLC paperwork

•  Business plan or proposal for how you plan to use the loan

•  Owner’s photo ID

It can be a good idea to gather these documents now so that you’re ready to go when you start applying for a small business loan.

4. Applying for Your Loan

Some applications, like those from an SBA lender, may be lengthy and complicated, while online lenders tend to have shorter applications. If you’ve already gathered what you need beforehand, however, applying should go pretty smoothly.

When filling out a business loan application, you’ll want to be sure to include everything the lender asked for and in the correct format. This can reduce any unnecessary back and forth between you and the lender and help make sure you get a decision as quickly as possible.

Once everything is in order, how you’ll actually apply for the small business loan will depend on the lender. An online lender may allow you to link your bank accounts through its website, whereas a bank may require you to apply at a branch or over the phone.

Turnaround time will also vary depending on the lender. Online lenders may let you know right away if you’re approved and funding may only take a matter or days or weeks to receive. With SBA loans, the application, approval, and funding process can take several months.

Uses for Business Loans for Liquor Stores

There are many things you can do with liquor store financing. Here are some ways you might spend the proceeds from a liquor store loan.

Expansion

Maybe business is booming and you’re ready to renovate or expand your store. Or, perhaps you’re interested in opening a second location or purchasing a competitor’s store. If you don’t have the cash to move forward on your plan, a liquor store loan can turn your vision into a reality. The idea is that the investment will help you bring in more revenue, which you can use to quickly pay back your loan.

Emergencies

When faced with an unexpected event, such as a major storm, a pandemic, or significant disruption in your supply chain, would you have enough cash to cover basic operating expenses for a few weeks or possibly months? Small business financing, such as a business line of credit, can help provide a cushion in case of an emergency.

Payroll

Your employees are key to the success of your liquor store. Getting a loan to cover payroll, such as a short-term business loan, business line or credit, or merchant cash advance, can help ensure that your team gets paid on time, even when cash flow is tight. This can help keep your workers happy and motivated to sell.

Technology Upgrades

Investing in new technology, such as a new point-of-sale system, cloud-based business management system, or an e-commerce site, can help streamline operations and enhance customer experience. A liquor store loan can help you take advantage of cutting edge technology that saves you time and helps boost profits.

Inventory

Another use for liquor store loans is to purchase inventory, which is likely your largest expense. A liquor store loan can allow you to stock up before peak seasons, take advantage of a great deal on a large purchase when it arises, and keep up with rising demand for certain products.

Pros and Cons of Owning a Liquor Stores

Owning a liquor store can be an appealing venture for entrepreneurs interested in the retail industry. However, like any business, it comes with its own set of advantages and disadvantages. Here’s a look at how they stack up.

Pros

Some of the benefits of owning a liquor store include:

•  Steady demand: Liquor is a consumable product with consistent demand. Regardless of economic conditions, people tend to purchase alcohol, making it a recession-resistant industry.

•  Profit margins: Liquor stores often have high-profit margins due to the markup on alcoholic beverages. By strategically pricing products and managing inventory, owners can maximize profitability.

•  Repeat customers: Once customers find a store that offers a wide selection, competitive prices, and excellent service, they tend to return, ensuring a steady stream of repeat business.

•  Diverse product range: Liquor stores offer a wide range of products, including various spirits, wines, beers, and mixers. This allows you to cater to a range of customer preferences and target niche markets, increasing your revenue potential.

•  Long shelf life: With many other retail businesses, such as groceries or fashion, overstocking can be a concern, since food can perish and styles tend to change quickly. With liquor stores, however, products tend to last a long time and, though new products come in, not many go out of fashion.

Cons

•  Licensing and regulations: Opening a liquor store involves obtaining specific licenses and permits, which can vary by jurisdiction. Navigating the complex regulatory landscape can be time-consuming and require compliance with strict guidelines.

•  High startup costs: Alcohol tends to be expensive, even at wholesale prices. In addition, you’ll need to pay for rent, utilities, payroll, insurance, and more. Liquor licenses can also be costly.

•  Social responsibility: Owning a liquor store comes with the responsibility of selling alcohol responsibly. Adhering to age verification laws, preventing sales to intoxicated individuals, and promoting responsible consumption can be demanding but essential for maintaining a positive reputation and avoiding legal issues.

•  Seasonal fluctuations: Liquor sales often experience seasonal fluctuations, with peaks during holidays and special occasions. Managing inventory and cash flow during slower periods requires careful planning to maintain profitability.

•  Security risks: Because alcohol is regulated and can be hard to obtain, it’s often targeted by thieves. These can be people looking to resell stolen liquor or underage kids looking for fun. To avoid shrinkage and keep up your profits, you’ll need to closely monitor your store.

The Takeaway

There are many types of loans available to you as a liquor store owner. The best rates and terms will typically come from the SBA 7(a) program if you qualify.

If you don’t have stellar credit or haven’t been in business for at least two years, you may want to consider an online term loan, a merchant cash advance, an equipment loan, or a business line of credit.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

FAQ

Are liquor stores eligible for SBA loans?

Yes, liquor stores can use SBA loans, such as the 7(a) or 504, as working capital to purchase equipment or buy real estate.

Can banks take liquor as collateral for a loan?

Liquor cannot be used as collateral for a loan. In some cases, however, a liquor license may be used to secure a loan.

How profitable can owning a liquor store be?

Liquor stores are known for having potential for moderate to high profit margins. Some stores see profit margins of 20% to 30%.

How much money do you need to open a liquor store?

The average cost to open a liquor store in the U.S. ranges between $50,000 and $100,000.

How big of a loan can you get to open a liquor store?

How big a loan you can get to open a liquor store will depend on the lender and your qualifications as a borrower. The maximum SBA loan offered for a liquor store is $5 million. SBA Express loans go up to $500,000.

Photo credit: iStock/CandyRetriever

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOSB-Q224-1863346-V1

Whatever stage your business is at, it’s important to understand the difference between solvency and insolvency. When a business is solvent, it means it can meet its long-term debt obligations. When a business is unable to cover those debts (even if it liquidated all of its assets), it is considered insolvent. Financial solvency is essential for the long-term survival of any business.

Read on to learn how solvency works, how it is measured, and what to do if your business is not currently solvent.

What Is Solvency?

Solvency is the ability of a company to meet its financial obligations. In other words, the business’s assets exceed its liabilities. Because solvency shows a company’s ability to manage its operations into the foreseeable future, it is considered a key measure of the financial health of any business, no matter what size or industry it is in. Solvency is also necessary to qualify for many types of small business loans.

While solvency is often confused with liquidity, they are two different metrics. Solvency shows your ability to repay long-term debt, while liquidity shows your ability to repay short and mid-term debt. Liquidity only looks at assets that can be quickly converted into cash. It’s actually possible for a business to be insolvent (it has more liabilities than assets) but still have enough cash to cover its near-term financial obligations.

Recommended: Factor Rates Defined

How Solvency Works

Because solvency shows a company’s ability to pay off its financial obligations, the quickest way to measure it is to look at its owners’ (or shareholders’) equity, which is the company’s assets minus its liabilities.Let’s use fictional company XYZ as an example.

XYZ’s assets: $4,000,000
XYZ’s liabilities: $2,000,000
XYZ’s owners’ equity: $2,000,000

Company XYZ is solvent due to its positive owners’ equity. There are also other ratios that can help to more deeply analyze a company’s solvency. These include:

•  Interest coverage ratio To get this ratio, you divide operating income by interest expense to show your company’s ability to pay the interest on its debt. A higher interest coverage ratio indicates greater solvency.

•  Debt-to-assets ratio This divides a company’s debt by the value of its assets to provide indications of capital structure and solvency health.

Recommended: Blanket Liens

<2>What Is Insolvency?

Small business owners commonly take out business loans to expedite growth. If a company takes on too much debt too quickly, however, it can lead to insolvency – a state in which a company can no longer pay off its debts because its assets are insufficient to meet its liabilities.

Many companies have negative owners’ equity, which is a sign of insolvency. This means the business has no book value and, should the company close (liquidating all of its assets to pay off all of its liabilities), it could lead to a personal loss for the owners if they are not protected by limited liability terms.

It’s not uncommon for new small businesses and start-ups to have negative owners’ equity on the balance sheet. As a company matures, generally its solvency improves.

How Insolvency Works

Businesses can also move the other way, going from solvent to insolvent. This can happen for a variety of reasons, including poor cash management, a reduction in cash inflow, an increase in expenses, lawsuits, and/or not adapting to changes in the marketplace.

When a company is insolvent, it means its liabilities exceed its assets. Here’s an example using fictional company ABC.

ABC’S total assets: $3,000,000
ABC’s total liabilities: $5,000,000
Shortfall: $2,000,000

Insolvency can lead to insolvency proceedings, in which legal action is taken against the insolvent business and its assets may be liquidated to pay off outstanding debts. Before that happens, however, business owners can contact their creditors directly and work on ways to restructure debts so that payments are more manageable. This is in the interest of both business owners and creditors, since creditors want to have their loans repaid, even if that repayment is late.

If an insolvent business is unable to settle their debts through other means, it may need to file for bankruptcy.

Solvent vs Insolvent: The Differences

A solvent company can pass these two tests:

The Cash Flow Test A solvent company can pay debts that are about to fall due, as well as debts that will be due in the near future, either with cash accumulated from operations or cash the business has in the bank. Can yours?

The Balance Sheet Test With this measure, an independent third party assesses the value of all your company’s assets as well as its liabilities. If the amount of the assets falls short compared to the liabilities, then the company has failed the balance sheet test. This indicates that your company will be unable to pay off current debts even if all of the company assets are sold off.

Failing one or both tests means you need to take steps to improve your business’s financial position.

Recommended: A Guide to Negative Working Capital

How to Remedy Insolvency

Moving a business from insolvency to solvency typically entails managing your debt and improving your cash flow.

To reduce your debt, consider listing all of your company’s debts in order of priority, focusing on debts that need to be paid immediately (such as those that could interrupt operations or lead to legal trouble if not paid on time) first. It’s also a good idea to reach out to your creditors to see if you can negotiate better repayment terms.

You might also want to look into refinancing your debt. This involves applying for a new business loan, ideally with more attractive terms, and using it to pay off your old loan. If you have multiple loans, you might consider business debt consolidation. This allows you to combine multiple loans into a new consolidation loan with one easy-to-manage payment. While getting a lower rate is an added perk, the primary purpose of business debt consolidation is to simplify your various loan payments.

In addition to managing debt, you’ll likely also need to find ways to decrease spending. You may be able to do this by cutting out all unnecessary costs and/or finding cheaper suppliers for materials, stocks, and/or insurance.

To further improve cash flow, consider ways to boost your customer base, such as using customer feedback, increasing social media and email marketing, and learning from other businesses.

How to Maintain Solvency

Maintaining solvency is essential for a company’s survival in the long run. That’s why it’s critical that companies regularly analyze their ability to meet both their short- and long-term liabilities. If, at some point, your company’s liabilities become greater than its assets, it’s important to take actions that can increase solvency, such as lowering overhead costs, reducing debt, and increasing cash inflows.

The Takeaway

Solvency is the ability of a company to meet its financial obligations and long-term debt. It’s also defined as the positive net worth of a company. The easiest way to assess a company’s solvency is by checking its owners’ equity on the balance sheet, which is the sum of a company’s assets minus its liabilities.

If your business maintains a positive solvency position, it means it can meet all of its financial obligations and remain operational in the long term. It also means that your company will have access to small business financing opportunities with lower rates and better terms, since banks and other lenders prefer working with solvent businesses.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

FAQ

How can you tell if a company is solvent?

The quickest way to assess a company’s solvency is to check its owners’ equity on the balance sheet, which is the sum of a company’s assets minus its liabilities. A positive number means the company is solvent. A negative number means the company is insolvent.

Can a business be liquid but not solvent?

Yes. It’s possible for a business to be insolvent (it has more liabilities than assets) but still have sufficient cash flow to cover any short-term liabilities. such as loans, staff wages, bills, and taxes.

Why would a solvent company be liquidated?

There are a variety of reasons that might cause a solvent company to be liquidated. If a firm can pay its long-term obligations, but no longer has a value proposition in the marketplace, then liquidation can make sense. A solvent company might also be liquidated because the owner has chosen to retire or focus on something else.

Photo credit: iStock/RapidEye

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOSB-Q224-1863314-V1

Whether you’re looking to open a European-style cafe, purchase a coffee shop franchise, or expand a coffeehouse you already own, you may need financing to bring your business vision to life.

The good news is that coffee entrepreneurs have access to a wide range of business financing options, including loans backed by the Small Business Administration (SBA), bank and online loans, equipment loans, merchant cash advances, and business lines of credit.

The best loan for your burgeoning coffee business will depend on how much capital you need, how you plan to use the funds, and your qualifications as a borrower. Read on to learn what types of loans are available for starting, buying, or expanding a coffee shop, as well as how to find and apply for a cafe loan.

What Are Business Loans for Cafes?

A cafe loan is any type of small business loan that will be used to start, expand, or purchase a cafe or coffee shop. Cafe loans can be short-term or long-term, and come with varying rates, terms, costs, and required qualifications. You can find coffee shop loans at banks, through SBA lenders, or via an online lending platform.

How Do Business Loans for Cafes Work?

A coffee shop loan is a business loan, which means that if your business already has its own established business credit score, you may be able to take the loan out entirely in your business’s name. If the business is new, you may need to sign a personal guarantee or take the loan out in your name.

Many business loans require some sort of collateral to secure the loan. Should you default on payments, this gives the bank some sort of recourse, meaning it could seize any assets you collateralized in lieu of payment.

There are many types of business loans on the market that have unique repayment options. Standard business loans require a set monthly payment, while other loan types may take a small percentage of credit card payments for each sale. No matter which loan you choose, expect to start making payments shortly after disbursement.

Recommended: Microloan Programs Available for Startups

Uses for Business Loans for Cafes

Hiring

Unless you’re planning on being a one-person show, you’re going to need to pay people to work for you. You’ll likely need baristas, servers, and cashiers to keep your coffee shop running smoothly.

Expanding

You can use a coffee shop loan to open a second location or to enlarge your current cafe so you can serve more customers.

Payroll

In a coffee shop, customer service is everything. However, there may be times when unpaid invoices and slow sales can prevent you from running payroll. A cafe loan can prevent you from losing your valued and well-trained staff.

Emergencies

A loan or business line of credit can help ensure that sudden, unexpected costs – such a costly refrigerator repair or a pest problem – don’t derail your business.

Inventory

Of course, you’ll need to invest in coffee to start your coffee shop. You’ll also need non-coffee items, such as tea, bottled water or juices, and baked goods. You may also want to include salads, ready-made sandwiches, and coffee-related products (like mugs and thermos containers) in your inventory.

Types of Business Loans for Cafes

Lenders offer different types of business loans that you can use to start, expand, buy, or renovate a coffee shop. Here are some cafe financing options you may want to consider.

SBA Loans

A loan backed by the SBA can be a great option for a coffee shop. The SBA itself doesn’t provide the financing, but instead works in partnership with banks and other lenders to guarantee a large portion of the loan’s proceeds in the event that the borrower defaults. Because this reduces the risk to the lender, SBA loans offer borrowers low rates, high amounts (up to $5 million), and long repayment terms (as long as 25 years).

With the popular SBA 7(a) loan, you can use the funds toward almost any business expense for your cafe. If you’re looking to buy a building for your coffee shop, you might want to look into an SBA 504/CDC loan, which is meant specifically for buying large fixed assets, including commercial real estate. If you’re starting a new cafe that will give back to the community or is female-, minority- or veteran-owned, you might be a candidate for an SBA microloan, which provides up to $50,000.

SBA loans can be difficult to obtain, however, due to rigid qualification requirements and an extensive application process. And, it can take several months before you will have access to the funds.

Term Loans

A term loan is a traditional business loan. Like an SBA loan, you get a lump sum deposited into your business bank account that must be repaid on a monthly or semimonthly basis.

Short term loans generally have six- to 18-month repayment terms and are often available through online lenders. They tend to be easier to qualify for, but come with higher interest rates than long term loans. Long term loans, on the other hand, have a repayment period of two years or more. These loans typically come with higher amounts, lower interest rates, and tougher qualification requirements. They are available through banks, credit unions, and SBA lenders.

Equipment Financing

To start a cafe or coffee shop you need to invest in commercial-grade equipment, such as espresso machines, brewers, roasters, and refrigerators. If you don’t need the flexibility of working capital but want funds to purchase big-ticket items, you might be best served with financing for equipment.

With equipment financing, the equipment itself acts as collateral, which keeps the interest rate low and your other assets (either business or personal) safe. You would typically get a quote for the equipment you’d like to buy, and a lender would then front you all or a large portion of the cost. Equipment financing can be limiting, however, as you can only use the funds for business-related equipment.

Business Line of Credit

If you prefer to have access to cash when you need it as opposed to getting it all at once, a business line of credit can be a good source of cafe financing. You can draw funds whenever you need to make purchases up to an agreed-upon credit limit and only pay interest on what you draw. Once you’ve paid back the loan, you can draw from it again.

A line of credit can be a good thing to have in your back pocket to cover unexpected cafe expenses, seize a good pricing opportunity on inventory, or manage cash flow during slow periods.

Invoice Financing

If cash flow is getting low and you have invoices out to clients that haven’t paid you yet, invoice financing can be a way to bridge the gap. With this type of financing, you sell your unpaid invoices to a lender who advances anywhere from 60% to 95% of their value, then take over the collection process.

Once your customer pays the outstanding invoice, you receive the money that’s left (minus fees). Invoice financing can help solve a cash crunch but tends to be more costly than other types of cafe financing.

Merchant Cash Advance

A merchant cash advance (MCA) is another form of short-term financing that may be worth considering if you need cash quickly or don’t have strong credit. With this type of financing, you receive a lump sum of money from an MCA company. In return, you give that company a small percentage of each credit card sale you make until the advance is paid off (plus fees).

For a cafe business, where a majority of sales are likely to come from credit and debit cards, this can be a valid way to borrow money with minimal risk. However, costs tend to be higher than other forms of business financing.

Getting a Business Loan for a Cafe

Finding Out What Kind of Loan You Want

To determine which type of cafe loan is the right fit for your needs, first think about whether your business needs money up front with a fixed term or more flexible access through a line of credit.

Also look at your qualifications as a borrower, since that will have a significant impact on your loan options. If you have solid credit and strong financials, you may be able to qualify for a low interest SBA or bank term loan. If you’re just starting out or don’t have strong personal or business credit, you may want to look into a short-term loan from an online lender, equipment financing, invoice financing, or a merchant cash advance.

How Much of a Loan Do You Need?

To determine how much money your cafe needs to borrow, you should create a detailed budget for how you will use the proceeds of the loan, and also estimate the revenue that you will generate by having access to the funds. Since there will likely be a delay before you see a return on your investment, you’ll also want to look at your cash flow to determine how much of a monthly loan payment you could comfortably afford to make.

Gathering Documents

You’ll need a variety of documents to apply for a small business loan. Exactly which ones will depend on the lender and whether you are starting a cafe or already have one in operation. The list may include:

•  Personal and business bank statements

•  Personal and business tax returns

•  Resume (for you and any other owners)

•  Business license and registration

•  Balance sheets

•  Profit and loss statements

•  Information on other loans

•  Proof of collateral

•  Business plan

•  A clear explanation of how you’d use the loan

Applying for Your Loan

Once you’ve collected all the needed paperwork, actually applying for a small business loan should be relatively simple. The exact steps involved will depend on the lender. With an online lender, you may be able to do the whole thing online, whereas a bank or credit union may require you to apply in person at a branch or over the phone.

Either way, when filling out a business loan application, be sure to include everything the lender asked for and in the correct format. This can reduce any unnecessary back and forth and help make sure you get a decision as quickly as possible.

Once you’re approved, make sure to review the loan agreement carefully to know exactly the terms you’re signing up for. Look especially closely at the annual percentage rate (APR). The APR represents the real cost per year of borrowing money because it includes interest as well as added fees. It’s also the best metric to use as a comparison if you’re evaluating multiple loan offers.

Compare Business Loans Today

With so many different cafe financing options available, it can take a bit of legwork to figure out which loan and lender will fit your needs best.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

FAQ

Can you use a loan to open a cafe or coffee shop?

Yes. Many lenders offer startup loans that can be used to open a cafe or coffee shop.

What kinds of loans are available for cafe owners?

Some of the loans cafe owners can take advantage of include:

•  Term loans

•  Small Business Administration (SBA) loans

•  Merchant cash advances

•  Invoice financing

•  Business lines of credit

•  Online loans

Is a coffee shop a restaurant for the purpose of small business loans?

Yes, a coffee shop loan is the same as a restaurant loan.

Photo credit: iStock/Dejan Marjanovic

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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If you’re just starting up your company, you could likely use a little financial help. While you might not need a big loan, you may just need $10,000 or $20,000 to help get your venture off the ground. Even so, you may find that traditional banks won’t lend any amount of money to a startup that doesn’t have an established credit history.

This is where microloans for startups can be helpful.

Microloans are small (up to $50,000), short-term loans extended to new startups and small businesses with only a few employees. They are commonly offered by nonprofit organizations that have a particular focus, such as lending to women, minorities, or other underserved entrepreneurs. Along with loans, many microlenders also offer free business mentorship, training, and assistance.

Read on to learn more about microloans for startups, including how they work, where to find them, and how to apply.

Microloan Programs Available for Startups

You won’t find as many lenders offering microloans for startups as you do traditional loan lenders, since it’s a bit of a niche offering. But they are out there. Here are five recommended microloan lenders.

1. SBA Microlenders

The Small Business Administration (SBA) Microloan program offers funding to small businesses that may not qualify for other types of SBA loans. The proceeds of these loans can be used to pay for a variety of business expenses, including working capital, inventory, furniture, or equipment.

SBA microloans are funded by the SBA and administered through a network of community lenders (called intermediaries). Microloan amounts can go up to $50,000 but the average loan amount is $13,000. The maximum repayment term allowed for an SBA microloan is six years. Interest rates vary depending on the intermediary lender but generally range between 8% and 13%.

You can find a lender that serves your area by searching the directory on the SBA’s website.

2. Accion Opportunity Fund

The Accion Opportunity Fund (AOF), which is part of the global nonprofit Accion, offers microloans to startups and businesses that might not qualify for financing elsewhere. The AOF doesn’t set a minimum credit score requirement. Their annual revenue requirements vary depending on the loan program.

AOF offers microloans of $5,000 to $100,000 with repayment terms of between 12 and 60 months, and doesn’t charge prepayment penalties. Interest rates depend on your credit and financial situation but range from 5.99% to 17.99%. In addition to financing, AOF offers educational resources, coaching, and support networks.

3. LiftFund

LiftFund is non-profit organization that offers a range of small business loans, including microloans and SBA loans to entrepreneurs in the following states: Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Missouri, Mississippi, New York, New Mexico, Oklahoma, South Carolina, Tennessee, and Texas.

The lender specializes in providing funding opportunities for startups that may have limited credit, collateral, or experience. The only eligibility requirements they list are that you must be at least 21 years old, your business cannot be in the adult entertainment industry, and you cannot have an active bankruptcy.

LiftFund also provides educational support for borrowers, including a digital library of resources to help you learn new skills like marketing, finance, and management.

4. Kiva U.S.

Kiva is a nonprofit peer-to-peer lender that helps new businesses in underserved communities access crowdfunded loans. They offer interest-free microloans of up to $15,000.

The process works differently than other types of small business loans. After filling out a brief application form, you’ll then have up to 15 days to invite your friends and family to lend to your business. This helps you establish the creditworthiness of your startup. Once that happens, Kiva opens the loan for the next 30 days to people who can help crowdfund the desired amount. You then have up to 36 months to repay your loan.

Kiva might be worth exploring if you need a small loan amount and have a strong community of supporters.

5. Grameen America

Grameen America is focused on helping female business owners who live below the federal poverty line get ahead. The organization provides microloans (starting at no more than $2,000), financial training, and support to members. Their microloans are also reported to Experian to help female entrepreneurs build credit as well.

The process for applying for a Grameen America microloan is different from other lenders. You start off in a small group of women and together take a financial training program. After that, you’re eligible to receive a microloan as you continue to network and learn during weekly meetings.

Interest rates on microloans range from 15% to 18% on a declining balance. There are no additional charges such as origination, late or monthly fees.

Microloans for Startups: Eligibility and Requirements

Eligibility standards for microloans will vary depending on the lender. Those offering SBA loans may have more stringent credit score requirements than other microloan lenders.

If you apply for a microloan with a lender that has a particular lending audience, you may need to fit into a certain ownership category, such as women or minorities.

Many microloan lenders will evaluate your ability to repay the loan by looking at your credit score, business revenue, any other sources of income you might have, as well as the length of time you’ve been in business.

How Can I Use a Microloan for a Startup?

A microloan can generally be used for any business-related expense or as working capital. You could use the funds to hire staff, buy supplies or equipment, renovate your office, or pay for legal fees.

Read through your loan paperwork to see whether there are any parameters for what you can or cannot spend the loan funds on before you sign your loan agreement.

Recommended: Business Loans for Coffee Shops and Cafes

How to Apply for a Microloan for My Startup

Many online applications for microloans for startups are simple and ask little more than your business details, revenues, and personal information, since you may be required to personally guarantee the loan. You might hear back right away or the lender may require a few days or weeks to review your application.

If you apply for an SBA microloan through a bank or other lender, the process may require more paperwork, such as financial statements. You may also have to apply in person rather than online.

It’s generally a good idea to check what you’ll need to apply before you begin the process. You’ll want to gather all the details and paperwork, and then dedicate some time to the process. Otherwise, you risk not being properly prepared and your application being delayed because you’re missing some key piece of information.

Recommended: What to Know About Short-Term Business Loans

Additional Resources for Startups

Besides financing, you might welcome other forms of support for your startup. Here are some resources that offer free assistance to new small businesses, such as access to mentors, help creating a business plan, business workshops, and training sessions:

•  Small Business Development Centers

•  Women’s Business Centers

•  SCORE

•  Your local Chamber of Commerce

The Takeaway

Not all businesses need a traditional bank loan, which can go as high as $5 million. If you’re starting a new, small-scale venture, you might simply need a little bit of extra capital to get your business off the ground. Finding the right lender for the size of loan you need is important, as is finding one willing to lend to a new startup.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

FAQ

What is a microloan?

A microloan is a short-term loan for a relatively small amount, usually under $50,000, that can be used to start or grow a business.

How can I get a microloan?

Individuals, nonprofit organizations, and alternative lenders typically issue microloans. The purpose of these loans is to provide entrepreneurs who otherwise wouldn’t be eligible for a business loan with access to affordable working capital.

How much is an SBA microloan?

The Small Business Administration (SBA), through intermediary lenders, offers microloans up to $50,000.

Photo credit: iStock/Goran13

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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Illiquidity and insolvency are both terms used to describe a business that is dealing with cash flow problems or operational inefficiencies. But they actually have different meanings. Illiquidity is when a company does not have enough current assets to meet its current liability obligations. Insolvency, on the other hand, is when a company does not have enough total assets to satisfy its total liabilities.

As a small business owner, it’s important to understand the difference between insolvency and illiquidity, how insolvency can lead to illiquidity, and what you can do to remedy either problem and get your business back on the road to financial health.

What Is Illiquidity?

To understand illiquidity, it helps to understand liquidity. When a company has liquidity, it means it has the ability to pay its current debt and liability obligations with its current assets. It does not need to liquidate any of its long-term assets to pay its short-term liabilities. Liquidity is a term often associated with a company’s cash flow and working capital management.

Current liabilities may include:

•  Accounts payable

•  Bills/utility payments

•  Loan payments

•  Taxes

Current assets may include:

•  Accounts receivable

•  Cash

•  Inventory

•  Securities: stock, treasury bills, or any security that can easily be sold

The opposite of liquidity is illiquidity. When a company is illiquid, it does not have the ability to pay its current liabilities with its current assets. If not remedied, illiquidity can lead to more serious financial problems in the future, including insolvency.

How Does Illiquidity Work?

A business that is illiquid is generally facing short-term cash flow issues. Its future is not necessarily in question, but it could be. The good news is that a business owner can often solve any issues with illiquidity by providing more capital, getting a small business loan or line of credit, and/or restructuring the company’s operations.

Recommended: What Is Trade Working Capital?

What Is Insolvency?

To understand insolvency, it helps to understand solvency. When a company is solvent vs insolvent, it means that its assets are worth more than its liabilities and it can meet its long-term debt obligations without any trouble. If a business is unable to cover all of its debts (even if it liquidated all of its assets), it is considered insolvent. Financial solvency is essential for the long-term survival of any business.

How Does Insolvency Work?

When a business is insolvent, it means that the owners’ (or shareholders’) equity, which is the company’s assets minus its liabilities, is negative. While it’s not uncommon for new small businesses to have negative owners’ equity on the balance sheet, solvency typically improves as a company matures.

However, businesses can also move in the wrong direction, going from solvent to insolvent. This can happen for many different reasons, including poor cash management, a reduction in cash inflow, an increase in expenses, lawsuits, and/or not adapting to changes in the marketplace.

Insolvency can lead to bankruptcy. It can also lead to insolvency proceedings, in which legal action is taken against the insolvent business and its assets may be liquidated to pay off outstanding debts.

Insolvency vs Illiquidity Compared

Illiquidity and insolvency have similarities, but also some key differences. Here’s how they compare.

Similarities

Both illiquidity and insolvency:

•  Are forms of financial distress

•  Occur when a company is unable to pay upon its debts because of a shortage of assets

•  Represent an immediate problem that must be addressed

•  Can lead to bankruptcy (although insolvency is more serious)

•  Can be solved

Differences

Here’s a look at how liquidity and insolvency differ:

•  Illiquidity is a short-term problem; insolvency is a long-term problem

•  Illiquidity is when a company doesn’t have enough in liquid assets to cover its current debts; insolvency is when a company’s overall debt exceeds its total assets.

Dealing With Liquidity Issues

If your business is in a state of illiquidity, you may be able to prevent insolvency by taking some of the following steps.

•  Sell off unproductive assets. Any asset that is not generating cash flow isn’t doing your business any good. Consider selling any idle machinery, unused computers, or rarely used vehicles.

•  Reduce overhead costs wherever possible. You may be able to improve cash flow by reducing how much you spend on marketing, subscriptions, and any other indirect expenses.

•  Be aggressive with accounts receivable. Don’t let customers go months on end without paying their invoices. Call and/or send reminder emails to get them to pay sooner.

•  Look into a line of credit. A business line of credit might help you cover gaps in cash flow due to payment schedules.

•  Consider refinancing your debt. This could lower your monthly bill. However, it may mean paying more in interest over the long run.

•  Consider invoice financing: Invoice financing can help solve short-term cash flow problems by providing immediate payment for your unpaid invoices (in exchange for a fee).

When Does Illiquid Become Insolvent?

If a company is unable to solve its cash flow issues (either by liquidating once illiquid assets, or raising capital internally or externally), that company could easily become insolvent.

If your business’s operating performance struggles for a prolonged period of time, and your short- and long-term cash inflows are no longer able to meet your financial obligations, the company could become insolvent. This means that its total debt has become larger than its total assets and you would not be able to cover your obligations even if you sold off all of your assets.

Dealing With Insolvency

Moving a business from insolvency to solvency typically entails managing your debt and improving your cash flow. Here are some steps you can take.

•  Attack your debt. List all of your company’s debts in order of priority. Focus on debts that need to be paid immediately (such as those that could interrupt operations or lead to legal trouble if not paid on time) first.

•  Follow up on unpaid invoices. Be sure to collect on any money that is due to your business.

•  Reach out to your creditors. If you explain your current situation, they may be willing to restructure your debt to make your payments more affordable.

•  Find ways to decrease spending. Cut out all unnecessary costs and also look for cheaper suppliers for materials, stocks, and/or insurance.

•  Boost your customer base. Try to increase sales by using customer feedback, increasing social media and email marketing, and learning from other businesses.

Recommended: Solvency vs Insolvency

The Takeaway

Illiquidity is when a company lacks the appropriate amount of liquid assets to pay its current obligations and debts. It can happen for many reasons, and does not necessarily mean a business is in long-term trouble.

Insolvency is when a company lacks the proper amount of assets (liquid or illiquid) to cover its debts and liabilities. In terms of financial distress, it is much worse to be insolvent than it is illiquid.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

FAQ

Is liquidation the same as insolvency?

No. Liquidation is when a company sells its assets to pay off its debts. Liquidation is often done in response to insolvency, which is when a company’s debts exceed its total assets.

Can a company be solvent but illiquid?

Yes. A company can be solvent, meaning its assets are greater than its total liabilities, but not have enough cash or easily liquidated assets to pay its short-term debts and obligations. Sometimes companies solve this issue by being more aggressive with their account receivables, or by turning to invoice financing.

What are liquid and illiquid assets?

A liquid asset is an asset that can easily be converted into cash in a short amount of time. An illiquid asset is an asset that cannot easily and readily be sold or exchanged for cash.

Photo credit: iStock/skynesher

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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