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As a business owner, it’s important to know the difference between working capital and changes in working capital. Working capital tells you the level of assets your business has available to meet its short-term obligations at a given moment in time. Change in working capital, on the other hand, measures what is happening over a given period of time with regard to the liquidity of your company.

Changes in working capital are often used by investors and lenders to assess the health and value of a business. Read on to learn what causes a change in working capital, how to calculate changes in working capital, and what these changes can tell you about your business.

What Is Net Working Capital?

Net working capital is simply another name for working capital. It’s a basic accounting formula companies use to determine their short-term financial health. The basic formula is:

Current Assets – Current Liabilities = Net Working Capital (or Working Capital)

What Is Change in Net Working Capital?

Change in net working capital refers to how a company’s net working capital fluctuates year over year. If your net working capital one year was $50,000 and $75,000 the next, you would have a positive net working capital change of $25,000.

Recommended: What Is Off-Balance Sheet Financing?

What Is Working Capital?

Working capital is a company’s current assets minus its current liabilities. Both current assets and current liabilities are found on a company’s balance sheet.

Current assets include assets a company will use in fewer than 12 months in its business operations, such as cash, accounts receivable, and inventories of raw materials and finished goods. Current liabilities include accounts payable, trade credit, short-terms loans, and business lines of credit. Essentially, working capital is the amount of money a company has available to pay its short-term expenses.

Positive Working Capital

A business has positive working capital when it currently has more current assets than current liabilities. This is a sign of financial health since it means the company will be able to fully cover its short-term obligations as they come due over the next year.

It’s possible to have too much of a good thing, however. Excessive working capital for a prolonged period of time can mean a company isn’t effectively managing its assets.

Recommended: Net Operating Working Capital (NOWC), Explained

Negative Working Capital

A business has negative working capital when it currently has more liabilities than assets. This can be a temporary situation, such as when a company makes a large payment to a vendor. However, if working capital stays negative for an extended period, it can indicate that the company is struggling to make ends meet and may need to borrow money or take out a working capital loan.

Working Capital Ratio

Another way to measure working capital is to look at the working capital ratio, which is current assets divided by current liabilities. Generally, a working capital ratio of less than 1.0 is an indicator of liquidity problems, while a ratio higher than 2.0 indicates good liquidity.

What Causes Changes in Working Capital?

There are a number of factors that can cause a change in working capital. These include:

Credit Policy

Credit policy adjustments often lead to changes in how quickly cash comes in. A tighter, stricter policy reduces accounts receivable and, in turn, frees up cash. That comes at a potential cost of lower net sales since buyers may shy away from a firm that has highly strict credit policies. Looser credit policies can have the opposite effect. As with many of these factors, there’s a tradeoff to weigh.

Accounts Payable Payment Period

Negotiating a longer accounts payable period with your suppliers frees up cash because you have more time to pay your bills. The downside is that a supplier might increase prices in response to allowing a longer payment period. Shortening your accounts payable period can have the opposite effect, so business owners will want to carefully manage this policy.

Collection Policy

A company’s collection policy is a written document that includes the protocol for tackling outstanding debts. If you’re seeking to increase liquidity, a stricter collection policy could help. Cash comes in sooner (and total accounts receivable shrinks) when there’s a short window within which customers can hold off on paying. A less aggressive collection policy has the opposite impact.

Growth Rate

Stronger growth calls for greater investment in accounts receivable and inventory, which uses up cash. This, in turn, can lead to major changes in working capital from one month to the next. A slower growth rate can reduce changes in net working capital.

Inventory Planning

Inventory decisions are a crucial factor that can lead to a change in working capital. If a company chooses to spend more on inventory to increase its fulfillment rate, it will use up more cash. Reducing inventory could free up cash to be used on other business expenses.

Purchasing Practices

A change in purchasing practices can also lead to changes in working capital. If the purchasing department opts to buy larger quantities at one time, it can lower unit prices. However, it means a higher outlay of cash. Buying in smaller amounts can have the opposite effect.

Hedging

Using hedging strategies to offset swings in cash flow can mitigate unexpected changes in working capital. However, there are some costs involved in these hedging transactions, which could affect cash flow.

Recommended: Variable Costing Income Statements

Formula for Calculating Change in Working Capital

The change in working capital formula is straightforward once you know your balance sheet. Simply subtract current liabilities from current assets. That difference is your working capital (WC).

Next, compare the firm’s working capital in the current period and subtract the working capital amount from the previous period. That difference is the change in working capital.

Change in WC = Current Year WC – Last Year WC

As an example, say your working capital in 2025 was $75,000. In 2024, your working capital was $50,000. Using the formula above, you have:

Change in WC = $75,000 – $50,000 = $25,000

You can then use this figure to better understand your company’s health. If your firm experiences a positive change in net working capital, it may have more cash to invest in growth opportunities or repay debt. If it experiences a negative change, on the other hand, it can indicate that your company is struggling to meet its short-term obligations.

Why Calculating Changes in Working Capital Is Important

As a small business owner, monitoring and understanding changes in working capital over time, whether it’s quarter over quarter or year over year, can help you better understand your company’s cash flow.

Working capital is also important if you’re trying to woo an investor or get approved for a small business loan. Lenders and investors will often look at both working capital and changes in working capital to assess a company’s financial health. Wide swings from positive to negative working capital can offer clues about a company’s business practices. A business owner can often access more attractive small business loan rates and terms when the firm has a consistent working capital policy.

Recommended: 15 Types of Business Loans to Consider

What Impacts Can Various Changes in Working Capital Have?

Change in working capital is the change in the net working capital of the company from one accounting period to the next. This will happen when either current assets or current liabilities increase or decrease in value.

Change in net working capital is an important indicator of a company’s financial performance and liquidity over time. By calculating the change in working capital, you can better understand your company’s capital cycle and strategize ways to reduce it, either by collecting receivables sooner or, possibly, by delaying accounts payable.

Understanding changes in cash flow is also important if you’re applying for a small business loan. Lenders will often look closely at a potential borrower’s working capital and change in working capital from quarter to quarter or year to year.

Positive Impacts

If the change in working capital is positive, then you have more assets than liabilities. This means the company’s liquidity is increasing.

Negative Impacts

If the change in working capital is negative, it means that the change in the current operating liabilities has increased more than the current operating assets. Cash has been used, and this reduces liquidity.

The Takeaway

Working capital is a basic accounting formula (current assets minus current liabilities) that business owners use to determine their short-term financial health. Changes in working capital can occur when either current assets or current liabilities increase or decrease in value.

As a business owner, it’s important to calculate working capital and changes in working capital from one accounting period to another to clearly assess your company’s operational efficiency. This is especially important if you’re in the market for financing. Lenders will often look at changes in working capital when assessing a company’s management style and operational efficiency.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

How is change in working capital calculated?

To calculate change in working capital, you first subtract the company’s current liabilities from the company’s current assets to get current working capital. You then take last year’s working capital number and subtract it from this year’s working capital to get change in working capital.

What are some things that can affect working capital?

Items affecting working capital include any changes in current assets and current liabilities. Current assets include cash (and cash equivalents), marketable securities, inventory, accounts receivable, and prepaid expenses. Current liabilities include accounts payable, short-term debt (and the current portion of long-term debt), dividends payable, current deferred revenue liability, and income tax owed within the next year.

What changes in working capital impact cash flow?

Any change in working capital can affect cash flow, which is the net amount of cash and cash equivalents being transferred in and out of a company. If the change in working capital is negative, it reduces cash flow. If the change in working capital is positive, it increases cash flow.

Photo credit: iStock/Hispanolistic

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

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.

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.

SOSMB-Q226-049

When you’re running a business, you may come up against unforeseen expenses, or an opportunity to grow your company may pop up, leaving you wondering about small business financing. But without working capital to cover those costs, it can be challenging.

If your business has substantial commercial property assets, one type of financing you might consider is a commercial equity line of credit (CELOC).

What Is a Commercial Equity Line of Credit?

A commercial equity line of credit (CELOC) is a type of credit offered by banks and other lenders that allows businesses to use their commercial property as collateral for financing needs. These credit lines work in a similar way to other lines of credit. Rather than receiving a large lump sum of funds up front, you are approved for a maximum amount, and then you can take out funds up to that max at any time. You pay back and owe interest only on what you have borrowed.

A commercial equity line of credit is generally secured by commercial property. In the event that the CELOC borrower defaults on the loan, the bank or lender can seize and sell that asset to cover the remaining balance.

Lines of credit can be useful because there are times when you need some cash now and some later, particularly with something like a renovation project. You won’t have to take out multiple small business loans if you need more money over time. You can simply borrow against your line of credit.

How Does a CELOC Work?

To qualify for a CELOC, a business must own commercial real estate with sufficient equity. Lenders typically require a comprehensive appraisal of the property to determine its current market value. The amount of credit available is usually based on a percentage of the property’s appraised value, minus any existing mortgages or liens. Businesses must also demonstrate a stable financial history, adequate income, and a good credit score to gain approval.

Once approved, the lender establishes a credit line up to the approved amount. The business can draw on this line of credit as needed, up to the maximum limit. The funds can be accessed through checks, a credit card linked to the account, or online transfers.

CELOCs typically have variable interest rates, which are tied to a benchmark rate such as the prime rate. Interest is only charged on the amount borrowed, not the entire credit line. Repayment terms can vary but generally include monthly interest payments and a minimum principal payment.

Types of Property for Your Collateral

When securing a CELOC with commercial real estate, you’ll want to check with the lender to confirm the types of property they will accept. Generally, commercial property valued up to $5 million may be eligible.

Common examples of what may be included:

•   Office

•   Retail

•   Warehouse

•   Multi-family

•   Light industrial

•   Mixed-use

Pros and Cons of a Commercial Equity Line of Credit

Like any type of small business financing, there are benefits and drawbacks to taking out a commercial equity line of credit.

Pros

•   Gives you access to cash when you need it over time.

•   May have lower rates than business credit cards.

•   Can help with cash flow during slow seasons.

•   Allows you to leverage business opportunities that arise.

•   Can help build business credit with on-time payments.

Recommended: How to Check Your Credit Score for Free

Cons

•   Interest rates may be high, depending on your credit scores, your annual revenues, and the value of your property.

•   There may be extra fees, such as for appraisals or late payments.

Recommended: Types of Small Business Loan Fees

Commercial Equity Line of Credit Uses

You can use a commercial equity line of credit for nearly anything that pertains to your business. A few examples of situations in which a CELOC could be useful include:

•   Cover gaps in your cash flow when you’re waiting for clients to pay you.

•   Pay for a larger inventory order so that you save what you spend per item.

•   Pay for payroll, office expenses, office equipment, or remodeling.

Recommended: What Are Partnership Business Loans?

Who Is a Commercial Equity Line of Credit Good For?

If you need short-term financing and expect to need funds over time rather than all at once, a line of credit could be an option to consider. Whether you have a slow period that you need to cover expenses for or are looking for capital for a real estate investment, a CELOC provides steady access to cash that is available when you need it.

Qualification Factors

Each lender will have slightly different requirements for applicants, and some require you to be an existing bank customer for at least six months.

Getting your finances in order is a good first step if you are interested in applying for any small business loan, including a line of credit. Lenders may require businesses to have a certain yearly revenue or time in business, and you may be asked for your profit and loss statement, tax returns, or other financial documents.

Additionally, lenders may require applicants to meet a minimum credit score requirement.

But one of the most important qualifications is the collateral. Generally, the higher the value of the commercial real estate you’re using for your asset, the more you will qualify for. Some lenders will determine the amount you qualify for based on the value of the property.

Recommended: Commercial Truck Financing

Where to Find a Commercial Equity Line of Credit

Start simply by seeing if the bank you already do business with offers a commercial equity line of credit. Since some lenders require CELOC borrowers to be existing customers, this may be an important consideration.

But that’s not your only option. There are also lenders who specialize in commercial equity lines of credit, and some online lenders may be more willing to work with you if you have less-than-excellent credit. Potential borrowers with a credit score on the lower end of the spectrum, however, may end up with a higher interest rate.

Recommended: Florida Small Business Grants

The Application Process

Before applying for a line of credit, calculate how much you need, both immediately and down the road. Calculate cash flow to see how long you can operate with what you have, then determine how much you want to ask for.

Keep in mind that you will be paying on your CELOC as soon as you borrow from it. As you repay the funds, it frees up more of your line, so you may not need a line of credit for as large a sum as you may originally think. A more moderate sum may suffice if you continually pay back what you’ve used and then take out more.

Applications will generally ask for some basic information about both you as the business owner and the business itself, including:

•   Name, address, and phone number

•   Date business was established

•   Employer identification number or Social Security number

•   Names of all owners and their personal details

•   Gross revenue

•   Details on bank accounts and current loans

If you are using your commercial property as collateral, you may also be required to provide details on it, including:

•   Property type

•   Address

•   Current market value

•   Loan balance if you have a mortgage on it

Depending on lender requirements, you may be asked to submit additional financial documents:

•   Business and personal tax returns

•   Balance sheet

•   Profit and loss statement

•   Schedule K-1

•   Personal financial statement

Recommended: Business Cash Management, Explained

The Takeaway

If you own commercial property and need access to working capital, you may be able to leverage your asset with a commercial equity line of credit. Be sure to shop around, as interest rates and terms can vary from one lender to another based on your qualifications.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What is a commercial equity line of credit?

A commercial equity line of credit gives you access to working capital, and you can borrow up to your maximum approved amount. You pay back only what you have borrowed plus interest and are able to continue to borrow against that line over time.

Can you take a HELOC on commercial property?

Each lender will have their own requirements for a home equity line of credit (HELOC). While some may consider commercial property, generally, HELOCs are for primary or secondary residences and some investment properties.

Can I get an equity line of credit?

If you own commercial real estate that can be used as an asset and meet a lender’s qualifications, you may be able to get an equity line of credit for your business. Requirements can vary between lenders, so check with your institution for specific details.

Is an equity line of credit a good idea?

An equity line of credit can be one solution for business owners who have commercial real estate they can leverage as collateral and who need access to funds over time rather than all at once. You might also use it to cover gaps in your cash flow or pay for a larger inventory order to reduce what you spend per item.

Photo credit: iStock/SouthWorks

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

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.

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.

SOSMB-Q226-050

If you run a small business, it’s important to categorize your expenses for tax purposes and to keep track of your small business spending. Many business expenses are tax deductible, which could save you hundreds, if not thousands, of dollars when it comes time to file.

Keep reading to learn what business expenses are, how to categorize them, which ones are tax deductible, and more.

What Are Business Expense Categories?

Business expenses include everything from paying rent and utilities to purchasing equipment and supplies to paying your employees. It can even include food and entertainment, travel, and office supply purchases.

By keeping track of what you spend and categorizing it appropriately, you’ll be eligible for more tax write-offs, which could save you and your small business thousands of dollars.

Why You Need to Categorize Business Expenses

Even if you work with an accountant, it may fall on you to make sure that the purchases you’re making for your business are entered into the appropriate categories in your accounting software.

There are, as you’ll soon learn, certain expenses you can deduct from your revenues for the year. That can help you pay less in taxes for your business. But to know how much, you’ll need to know what you spent in different categories so that you can file your taxes correctly with the IRS.

What deductible business expenses can do for you is reduce your taxable income. If your revenues last year were $250,000 but you had $50,000 in deductible business expenses, you would pay taxes on only $200,000 in revenue.

Categorizing business expenses can also help you keep an eye on where you’re spending money. Running an expense report can show you at a glance where you might be overspending so you can strategize about how best to cut back.

Recommended: 25 Tax Deductions for Freelancers

How to Categorize Business Expenses

One good way to categorize expenses as a small business is by using accounting software, such as QuickBooks or FreshBooks. With these programs, there will be some preset categories, such as travel and payroll, but you may also want to add your own to keep a more detailed account of where you’re spending money.

Most accounting software will connect to your bank accounts and upload your transactions. It’s still a good idea to log in every week or month and review your transactions to make sure they’re appropriately categorized.

What Is a Deductible Business Expense?

As part of learning how to categorize expenses for small businesses, you’ll need to understand deductible business expenses.

According to the IRS, in order for a business expense to be deductible, it must be ordinary and necessary.

As an example, a vehicle you use for your contracting company would be considered ordinary and necessary for your business to operate. Thus, costs related to it, such as interest on the loan and upkeep, would be deductible. But those same expenses for your personal vehicle would not qualify.

10 Key Business Expense Categories

Anything that isn’t considered working capital or cash in your accounting software is an expense. If you learn how to categorize expenses for your small business, your accounting will be easier. Here are a few common business expense categories.

1. Rent

You likely rent office or retail space for your business. You might even have an additional warehouse or storage unit. All of these should be categorized under rent.

2. Vehicle Expenses

If you use one or more vehicles for your business, you can categorize the following as business expenses:

•   Auto lease

•   Loan interest

•   Gas

•   Mileage

•   Registration and fees

•   Insurance

•   Repairs and maintenance

•   Parking

3. Advertising

If you pay for advertising or marketing for your business in the form of online ads, radio spots, or even a marketing consultant, these expenses should all fall under the category of advertising.

4. Travel Expenses

Is traveling to see clients or attend trade shows part of your business? You can deduct business airline travel, hotels, rental cars, and meals while traveling when you file your taxes. Just keep all these items categorized under travel.

5. Food and Entertainment

Whenever you take a client out to dinner or host an employee lunch at the office, you’re spending money on food for your business, so categorize it as such.

6. Office Supplies

You spend money on paper, ink, pens, printer cartridges, and other office supplies for your business. Create a category for office supplies and make sure all these expenses fall under it.

7. Payroll

Whether you have full-time employees, part-time staff, or contractors, you can categorize all of their wages under payroll. This also includes employee benefits and health insurance.

8. Services and Utilities

This category includes things such as internet service and electricity, as well as phone service for your business.

9. Loans

If you’ve taken out a small business loan or line of credit, you may find it helpful to have a category for your loan payments. Keep in mind that only the interest on business loans is deductible on your taxes.

10. Taxes

While it’s not necessary, you may find it beneficial to create a category in your system for taxes that you’ve paid. This makes it so you can easily see how much you’ve paid year to year.

Which Business Expenses Are Tax Deductible?

All of the above business expenses are tax deductible. Some expenses are fully deductible, whereas others, such as food, receive a 50% deduction.

Other business expenses that are tax deductible include donations to business organizations, educational expenses such as workshops, courses, and webinars, childcare, and interest paid on investments.

Which Category Does a Home Office Fall Into?

If you work from home, you may be wondering which business expenses are tax deductible and what category a home office falls into. For home-based businesses, you can deduct (or write off) all the business expenses already listed, plus a home office.

When you file your taxes, you’ll have two options for how you claim your home office and business expenses.

•   The simplified option: If you choose the simplified option, you’ll be asked for the size of your office space. This number is multiplied by a prescribed rate to determine your home office deductions.

•   The regular method: Because you use a portion of your home for your office, you can deduct a portion of your home’s expenses, including rent or mortgage, utilities, internet, and home repairs. You’ll need to track those expenses and then determine what percentage your home office used, based on its size in proportion to your home’s total square footage.

Recommended: Home Office Tax Deductions: Do You Qualify?

The Takeaway

Setting up categories for your business expenses can help you pay less in taxes when you look at deductible expenses, and it lets you see the big picture in terms of where your company is spending money.

Deductible business expenses include rent or interest paid on a mortgage, vehicle expenses, office supplies, marketing, and more. Interest paid on small business loans is also considered a tax-deductible business expense.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What can you write off as a business expense?

Any expenses considered ordinary and necessary for your business may be written off (i.e., deducted). This can help reduce your taxable income.

What are the biggest kinds of business expenses?

Your biggest business expenses may vary, depending on the business. For some businesses, it might be a commercial mortgage or equipment you need to manufacture products. For many others, payroll may be the largest expense.

How are you supposed to track your business expenses?

The easiest way to track expenses is through accounting software. Most will connect to your business bank account so that your transactions are automatically uploaded. However, you may need to review them to make sure they’re categorized correctly.

How do you categorize business expenses?

Business expenses are categorized automatically through accounting software, but you can also manually categorize your spending. Business expense categories include rent, employee salaries, inventory and supplies, travel, marketing expenses, childcare, interest paid on small business loans, and more.

What categories are used for business taxes?

Categories used for business taxes include rent or interest paid on your mortgage, travel, food and entertainment, marketing expenses, interest paid on small business loans, employee wages, vehicle expenses, donations to business organizations, and more. To make sure you don’t miss a deduction, it’s wise to categorize all of your business spending.

Photo credit: iStock/Rockaa

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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.

SOSMB-Q226-048

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 they 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 as 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 juice, and baked goods. You may also want to include salads, ready-made sandwiches, and coffee-related products (such as mugs and thermal 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. Instead, it 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 gain 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 semi-monthly basis.

Short-term loans generally have three- to 18-month repayment terms and are often available through online lenders. They tend to be easier to qualify for but can 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’re 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 consider 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.

Recommended: 8 Tips To Get Equipment Financing With Bad Credit

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 70% to 95% of their value, then takes 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 for 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 business loan is the right fit for your cafe, 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 an MCA.

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’re 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 a good metric to use as a comparison if you’re evaluating multiple loan offers.

The Takeaway

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. The best option for your coffee shop will depend on your business goals and how you plan to use the funds.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business 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?

There are several loans cafe owners can take advantage of. These include:

•   Term loans

•   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

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If you’re launching and growing a startup, your great idea is only the beginning. Many founders need mentorship, funding, and other resources to turn their startup into a successful business.

Both startup accelerators and incubators can provide this support, but they do so in different ways. Startup accelerators are shorter programs for early- and mid-stage founders who already have a minimum viable product (MVP). Incubators tend to be longer programs that guide founders from their earliest stages.

Understanding how both programs work can help you choose the right fit for your business stage and goals.

What Is a Startup Accelerator?

Startup accelerators are short, intensive programs designed to help startups grow quickly. They’re geared toward founders who already have a minimum viable product (MVP) or early traction with customers.

These intensive, structured programs provide mentorship, networking opportunities, investor connections, and education on fundraising, product development, and marketing. They also typically provide funding in exchange for equity in your company.

Some accelerators end with a demo day, where startups pitch to venture capitalists and angel investors. They usually span three to six months and have a competitive selection process.

What Is a Business Incubator?

A business incubator is geared toward startups in their earliest stages. It doesn’t usually provide funding; instead, it offers mentorship, office space, and professional networking opportunities.

Incubator programs focus on helping entrepreneurs turn their ideas into products, develop their business model, and determine product-market fit. You can often share a workspace with other entrepreneurs and get guidance from legal experts.

There’s less pressure for immediate growth, and programs may span one to five years. Since incubators often don’t provide direct funding, founders may seek outside capital through small business financing, seed funding for startups, startup loans, grants, or investors.

Startup Accelerator vs. Incubator: How They Compare

Although accelerators and incubators share some similarities (and these terms are sometimes used interchangeably), they serve different purposes for startups. Here’s a comparison of startup accelerators vs. incubators.

Accelerators tend to be smaller and more selective than incubators. Entrepreneurs may move across the country to take part in an accelerator program, whereas incubators may be available in multiple locations.

The programs also differ when it comes to funding and pacing. Accelerators often connect early-stage investors with founders and take an intensive, fast-paced approach to growth. Incubators usually don’t involve funding and allow startups to develop more gradually.

Benefits of Startup Accelerators and Incubators

Both startup accelerators and incubators can provide a major leg-up for entrepreneurs navigating the startup world. Some benefits that both programs share include:

•   Mentorship: Both programs can connect you with experienced mentors who can guide you in developing your product and growing your business.

•   Networking and community: You’ll make valuable connections with industry experts and fellow entrepreneurs.

•   Access to office space: You can access resources like office space, equipment, and software, as well as legal and marketing services.

•   Post-program guidance: Many programs provide ongoing support and resources even after you’ve graduated.

Some benefits that are unique to accelerators include:

•   Seed funding: You’ll often find startup funding options in exchange for equity in your company.

•   Rapid growth: Accelerators push you to grow quickly in a short amount of time.

•   Structured learning: You’ll take part in a structured program that includes workshops and trainings.

•   Demo day: Many programs culminate in a demo day that can provide exposure for your company to investors and potential partners.

•   Credibility: Being accepted into a well-known accelerator can provide your startup with credibility right away.

Incubators, on the other hand, can provide:

•   A nurturing environment: You’ll get a supportive space where you can refine your idea and grow your business without the pressure to scale rapidly.

•   Long-term focus: Incubators tend to be longer programs that allow you to grow at your own pace.

•   Lower-risk program: You’ll have more time to experiment and won’t have to offer equity or manage the pressure that may come from investors.

How to Choose Between an Accelerator and an Incubator

Both accelerators and incubators can offer the mentorship, networks, and resources that can take your startup to the next level. When deciding between the two, some questions that can help you choose include:

•   What stage of growth is your startup in?

•   What kind of funding are you looking for?

•   Who would you like to learn from?

•   Are you able to relocate if necessary?

•   What’s the success rate of past participants of the program?

•   What percentage of equity do you have to give away, if any?

An accelerator may be the better fit if you already have an MVP and some market traction and want to scale quickly. It can help you get funding in exchange for equity, but you must be prepared for an intensive program aimed at rapid growth.

An incubator may make more sense if you’re still developing your idea or building your product. It will give you long-term support, mentorship, and resources while allowing you the flexibility to experiment and continue refining your business model.

Examples of Notable Accelerators and Incubators

There are a variety of well-known business incubators and accelerators, with some more competitive to get into than others. Some notable startup accelerator programs include:

•   Techstars

•   Founder Institute

•   Y Combinator

•   AngelPad

•   Startupbootcamp

•   500 Global

Some well-known incubator programs include:

•   TechNexus

•   Capital Factory

•   Seedcamp

•   Wayra

•   MassChallenge

•   1871

•   Cambridge Innovation Center

•   Harvard Innovation Labs (i-lab)

Some incubators are affiliated with universities, especially schools that offer entrepreneurship programs.

The Takeaway

Understanding the differences between startup accelerators and incubators can help you choose the right support system for your business journey. In general, accelerators are designed for founders of more established startups who are prepared to scale quickly. Incubators focus on founders in the earlier stages who may still be developing their ideas and business model.

Whichever you choose, you could gain invaluable mentorship, networking opportunities, resources, and other support to meet your business goals, helping you decide if you want to pursue small business financing or other funding methods.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What is the main difference between a startup accelerator and an incubator?

The main difference between a startup accelerator and an incubator is the pacing and stage of business they support. Accelerators are short-term, intensive programs for startups that already have a minimum viable product, whereas incubators are longer, more flexible programs that can guide startups through their infancy.

How do you apply to a startup accelerator or incubator?

You usually apply online to startup accelerators and incubators and provide information about your business idea, team, product, market opportunity, and plans for growth. For accelerators, you may need to prove your product-market fit and business model, whereas incubators don’t require an MVP or developed business model yet.

Do accelerators and incubators take equity?

Accelerators typically provide funding in exchange for a small stake of equity in your company. Incubators are less likely to provide funding and take equity, though you may apply for free grants for startups.

What stage should a startup be at to join an accelerator or incubator?

Accelerators are designed for startups that already have a minimum viable product. Incubators, on the other hand, can support founders with innovative ideas who are much earlier in the lifecycle of their business.

What are some well-known startup accelerator and incubator programs?

Some well-known accelerator programs are Techstars, Founder Institute, Y Combinator, AngelPad, and Startupbootcamp. Some well-known incubator programs include TechNexus, Capital Factory, Seedcamp, and Wayra.

Photo credit: iStock/FreshSplash

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