A lot goes into a great cup of coffee, and the same is true for a great coffee shop. To succeed, you need to stand out. This requires doing your homework and channeling everything you learn into a solid business plan.
Over the next few months, I’ll cover aspects of successful business plans. Because most coffee house owners require financing of some kind, let’s start with what you’ll need to impress your banker to obtain a loan. You’ll need the same kind of information for approaching other investors, even family and friends.
In some ways, bankers are much like entrepreneurs. They’re always seeking new clients and would not stay in business if they did not lend money. Your job is to make it easy for them to lend money to you. Here’s how:
Build a Relationship. Get to know your banker before you need to ask for a loan. Set up accounts for personal savings, checking, business credit cards, merchant processing, etc., as long as the rates are competitive. It’s often best to choose a bank that targets entrepreneurs. Even if a business bank can’t issue a loan, its lending officers might be able to connect you with investors, grant opportunities and funding programs sponsored by universities, private foundations and government.
Toot Your Horn. Your banker wants to see that you have the gravitas to run a successful business. Now is not the time to be modest. Collect information about your career successes, educational attainments, and coffee industry experience (if you have any). Be prepared to explain that you have the skills, determination and self-confidence needed to succeed. Work this information into your business plan and have few anecdotes to share in conversation.
Illustrate How You’ll Succeed. Make sure you know how your coffee house will stand out from the competition and how you’ll cater to your local audience. Don’t approach the banker until you can demonstrate that you’ve thought of everything and that you have a contingency plan. This means you’ve nailed down everything from your location and how much it will cost to purchase equipment to your suppliers and how you’ll reach potential customers. Be prepared to prove or qualify every assumption in your plan.
Explain the Industry. Coffee houses occupy a unique niche in the restaurant industry, and in most cases you’ll need to educate your banker. When one of my clients applied for financing, her banker proceeded to tell her that she could not run a successful business just by selling coffee. Because she understood industry fundamentals, she was able to explain why a coffee house would survive – and thrive – without also becoming a restaurant serving sandwiches, soups, salads, etc. In the end, she received the financing she requested.
Demonstrate Financial Strength. Bankers will want to know your personal and business net worth to judge your ability to meet your financial obligations. They will also look at your past credit history – and use it as an indicator for the future. Make sure you have explanations for any blemishes. They also will ask for some investment on your part as proof of commitment. This consists of an injection of capital and/or collateral as security for the loan.
Show Them the Money. Banks are averse to risk; they loan money only when they’re fairly certain it will be repaid. As a result, it is very important for you to demonstrate how your coffee house will make a profit. Submitting detailed financial projections also helps the bank understand your business and how you’ll use the funds.
How important are financials? Extremely! Most bankers tell me they skim through the business plan, and then flip directly to the financials if they’re interested. The financial section of your business plan requires three documents: a cash flow statement, an income statement (also known as a profit & loss statement or P&L), and a balance sheet. Make sure these paint an accurate and comprehensive picture of projected investment, income, expenses and cash flow.
Get Backup. If you don’t have coffee industry experience, you can significantly increase your odds of success by working with established coffee roasters and business consultants. Adding their expertise to your own helps reassure the banker that you know what you’re doing.
Now that we’ve explored how to impress your banker, we can take a more in-depth look at other business plan fundamentals. Next month, we’ll be looking at how to determine your break-even point.
Greg Ubert, founder and president of Crimson Cup Coffee & Tea, has been roasting coffee in small batches since 1991 and has taught hundreds of business owners how to run successful independent coffee houses. The author of Seven Steps to Success in the Specialty Coffee Industry can be reached at email@example.com.