Roast #50: thoughtful cafe financing/location

cafe series — edition 2.0

Man, I thought the last post (cafe series — edition 1.0) was in December or something. It was actually in September (over 6 months ago).

January and February were full-on business plan writing. March and April have been largely focusing on financials and applying for financing. May and June will be lease touring.

Business Plan:

We needed a business plan to use for funding conversations. I originally thought this would be some admin work that just had to be done, but it turned out to be really helpful. Going through it helped me cement and think through many ambiguous parts of the cafe journey.

Financial Modeling:

Since the cafe would be a new business, we needed to prepare financial projections. This was the most daunting part of the entire business plan process. I had no idea where to start. I tried building the model from the ground up, but that went nowhere.

Our basic ass spreadsheet that did 0 projections. I would not suggest trying to build your financials from the ground up.

I only started making real progress after finding another F&B owner sharing theirs on reddit and that gave me a template to go off of. I duplicated it and reconfigured it to work with a cafe. I spent maybe a week (after work hours) navigating the formulas to understand how it all came together.

I learned a few things after putting together a model.

That little cell determines whether we make money or lose money

The first was that we need traffic to survive (duh). I guess I didn’t believe it until I modeled it out. This ends up being the main dependent variable that you tweak to adjust sales. You drop your traffic estimate too low, and your projections turn negative. Seeing that was a bit shell-shocking.

The second is that we need to start off strong. This isn’t to say that if we don’t start off strong, then we are finished. It’s more that, because we start off so much in debt, we want to optimize for revenue right away. From purchasing insurance and equipment to completing a buildout, we will be short on cash.

Add to that loan payments, and the financial pressure increases even more. The good thing is that I think if I’m able to make it past the first two years, then the remainder might be smooth sailing.

Financing:

Finding money was much harder than I thought it would be. I went into this thinking it would be easy for lenders to lend to us, as we felt we had a head start compared to many other new/opening cafes: we had a brand and some consistent revenue.

List of lenders

I was wrong. Where we were often disqualified was the revenue piece. We weren’t able to demonstrate that we could repay the target borrowed amount. Some lenders (mostly CDFIs) were flexible and were willing to go based on our projections, but many didn’t move us forward.

We were looking to borrow around $100,000, but we don’t generate that much revenue yet. Moving forward, I’m going to try to figure out a way to push more volume (at the expense of margin) as I think having higher cash flow makes us more appealing to lenders.

In addition to loans, I also explored applying for grants. This pretty much went nowhere. I looked into more formal NYC grants, but we didn’t quite fit in any of their criteria.

I looked into Skip and felt that their grant opportunities were just a gateway to upsell me on their other products.

No Daniel, I do not want to receive $29 of Skip credit

I also considered crowdfunding, borrowing from my 401K, some sort of funding through discounts service (ie inKind), and just asking friends to lend us money through a promissory note. We might still turn to some of these options. I’m just listing everything we considered to share.

Anyway, the good news is we got approved for a loan. It’s not the entire amount, but I think it’s enough to get us to open.

It still could fall through as we haven’t closed (need a lease + some other things), but are approved

One interesting note about the process was I went in thinking that I should figure out funding before signing a lease. This was backwards. Most lenders expected me to have a signed lease. The reason they want a signed lease is it’d give them more concrete numbers to work with in their underwriting.

The current funding plan is:

• We will complete the buildout with money primarily from the approved loan and our personal funds.

• We’ll purchase remaining equipment through promotional 0% interest credit cards.

• We’ll leave whatever is leftover for working capital

  • We’ll open crowdfunding at the end to let people contribute.

  • We may go back to a lender who put us on pause as they mentioned they’d be open to lending to us post-opening.

It’s going to be really tight. I think total, I’ll be at a total of ~$150K cash and a credit card buffer of around $40K. I’m going to really, really try and optimize for costs where it makes sense.

Lease + Location?

We’ve had a few spots that piqued our interest, and we expressed interest in one to move forward with. This was an old wine bar in East Williamsburg (on 550 Metropolitan ave).

We liked the spot because it was in a neighborhood I’m familiar with (I live 5 minutes away), it was close to the subway (G lorimer stop), it was within our budget, and it had some leftover equipment for us to start with. Unfortunately, they signed the spot to another business. :(

one part of it — this was relative to in-place fixtures in the remaining bar

So back at square one again. With more concrete financing now, I plan to expand my search to more parts of Brooklyn and hope to move with more certainty.

I’m planning to include:

• Clinton Hill

• Park Slope

• Parts of Bedstuy

I’d love to be by the G. It might be counterintuitive given how unreliable it is… but I don’t know. Maybe this preference stems from the fact that I don’t have a car, and it’d be easy for me to go to/from the roastery/home.

But these spaces would still have to fit our existing criteria:

• Minimal buildout (has water/electrical infrastructure, has a certificate of occupancy for food, doesn’t have a ton to strip/demo [ie restaurants])

  • so preferably an ex-cafe

• 450 to 700 square feet

• Rent is at or below $5,000 a month.

If you see anything, hit me up. Hopefully, in the next “cafe” post, we’ll be able to share that we’ve found a space. :)

What else?

I’ve been accumulating equipment. I think I’ve found our espresso machine as well as our grinders. I’m now looking for a single pot fetco brewer, a hot water tower, and then… I think we’ll be set in terms of big coffee equipment.

I’ve also been thinking about how our roasting patterns will change. I think we’ll roast once a week, while forward roasting for service two weeks ahead and retail that week. But I need to sit down and write it out.

I’ve started speaking with our exporters for samples that would go good dark/medium. I’ll find something that works financially and will probably contract a large amount of it for our core service.

I’ve started getting insurance quotes.

But all the above points are all minor to securing a space.

Thank you’s:

Thank you to many of you (Mennie, Ray, Colin, Leeor, + more) who have offered introductions to architects, real estate brokers, general contractors, etc. Having a team validated by word-of-mouth makes the process feel much safer.

Kevin and Linh from Kinhfolk for help with equipment. They’ve been helpful in providing thoughts on espresso machines/grinders.

Katie from Principles. Katie’s transparency has been helpful in providing a grounding for our numbers. We also ended up borrowing from the same lender as they did, and we wouldn’t have known about them had Katie not shared.