How to Get Financing for Opening a Bakery

Opening a bakery? This is the right time to pursue assistance for equipment financing, a cash advance, a letter of credit or other forms of financing that suit your needs. Financing is common in our society; in fact, over 42,000 Small Business Administration (SBA) loans were made in 2020 totaling $22.5B. So, yes, this is a great time to get a slice of the pie. 

Opening a bakery can be the culmination of your dreams; however, it requires start-up capital and, oftentimes, you’ll need to purchase or repair equipment, ovens, refrigerators, prep and cook tools, and many additional items along the way. The challenge is to find the best form of funding to cover your needs; in this article, we’ll detail some financing options for you.

Small Business Administration (SBA) Loans

The SBA has a number of loans for startup and established businesses. Here are the options from which to choose: 

7(a) loan program – offering up to 5M for the following uses, the 7(a) loan program is the most popular for startup companies. The interest rate charged is tied to the U.S. Treasury rates.

• General business expenses
• Equipment or machinery
• Purchase of land or building
• Building improvements
• Installation of fixtures

504 loan program – The CDC/504 Loan Program provides long-term, fixed rate financing for major fixed assets that promote business growth and job creation. 504 loans are available through Certified Development Companies (CDCs), SBA’s community-based partners who regulate nonprofits and promote economic development within their communities. CDCs are certified and regulated by the SBA.

The maximum loan amount for a 504 loan is $5M. For certain energy projects, the borrower can receive a 504 loan for up to $5.5M per project, for up to three projects not to exceed $16.5M total.

Microloan program – The microloan program provides loans up to $50,000 to help small businesses and certain not-for-profit childcare centers start up and expand. Funding is provided for the following purposes: 

• Working capital 
• Inventory 
• Supplies 
• Furniture 
• Fixtures 
• Machinery 
• Equipment

SBA provides funds to specially designated intermediary lenders, which are nonprofit community-based organizations with experience in lending, as well as management and technical assistance. These intermediaries administer the microloan program for eligible borrowers.

Term Loans

A term loan is a certain lump sum of cash provided upfront upon signing a loan agreement. 

There are three types of Term Loans from which you’ll choose: 

• Short-term loans: These types of term loans are usually offered to companies that don’t qualify for a line of credit. They generally run less than a year, though they can also refer to a loan of up to 18 months.
• Intermediate-term loans: These loans generally run between 1 to 3 years and are paid in monthly installments from a company’s cash flow.
• Long-term loans: These loans last anywhere between 3 to 25 years. They use company assets as collateral and require monthly or quarterly payments from profits or cash flow. They limit other financial commitments the company may acquire, including other debts, dividends, or salaries for stakeholders, and can require an amount of profit set aside specifically for loan repayment.

Term Loan conditions:

• Borrowers agree to pay lenders a fixed amount over a certain repayment schedule with either a fixed or floating interest rate.
• Term loans are commonly used by small businesses to purchase fixed assets, such as equipment or a new building.
• Borrowers prefer term loans because they offer more flexibility and lower interest rates.
• Short and intermediate-term loans may require balloon payments while long-term facilities come with fixed payments.

As a business owner, you will apply for a term loan by approaching a lender. You will need to provide a business plan and financial evidence demonstrating your creditworthiness. If you don’t yet have a plan, use this bakery business plan template as a comprehensive guide. Approved borrowers get a cash payout and are required to make payments over a certain period of time, usually on a monthly or quarterly repayment schedule. 

Term loans carry fixed or variable interest rates. If the proceeds are used to finance the purchase of an asset, the useful life of that asset can impact the repayment schedule. The loan requires collateral to reduce the risk of default. As noted above, some lenders may require down payments before they advance your loan.

Business Line of Credit

Similar to a small business loan, an unsecured line of credit revolves like a credit card. It provides money when needed to cover business purchases. Unlike a small business loan, however, there’s no funding made when the account is opened and no monthly payment unless the line of credit is utilized. 

Each financing option offers funding in different configurations; consider each carefully and enter into loan agreements that best suit your bakery. Wishing you the best success!

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