how do commercial coffee machine leases work?
Post on 16-Apr-2017
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How Do Commercial Coffee Machine Leases
Work?
www.honestcoffees.com@HonestCoffees
Buying or leasing a commercial coffee machine for
your office or cafe can be an extraordinarily baffling
experience. It's super opaque to the point where it
almost feels like you're buying a used car from
someone trying to get one over on you.
In this post, we're going to explain both the
business model / theory behind buying or leasing a
professional coffee machine and then go into the
specifics of how we do things at Honest Coffees.
In many ways, coffee machines are like any retail item:
1. A coffee machine company makes a machine then
sells them on to a distributor.
2. The distributor (that's us!) buys the machine, marks it
up some percentage, and sells it to an end user (that’
s you!) for a profit.
But a coffee machine by itself if pretty useless - it needs
coffee to complete its mission in life: A bit like a shaving razor
and a razor blade or mobile phone and sim card. Further,
commercial coffee machines are pretty expensive - the
cheapest begin at around £1,000 while pricier (but still
common) models can reach £12,000. Because of that, many
clients choose to lease over 3-5 years to defray the cost a bit.
So many coffee companies will take a loss on the machine
and sell their coffee for a significant margin.
Leases complicate the straightforward model above a bit. Instead of simple one-two, it's something like:
1. A coffee machine company makes a coffee machine then sells it on to a distributor.
2. The distributor (that's us!) buys them, marks it up some percentage, and sells the coffee machine on to a leasing company for a profit.
3. The leasing company collects lots of payments over 3 - 5 years that add up to an amount that's higher than what they paid the distributor.
4. When those payments are all done, ownership of the machine reverts to either the distributor (us) or the client (you).
That long-term commitment gives the machine distributor an opportunity to sell the client their coffee over the duration of the lease, which can be a fantastic (and lucrative) opportunity. At this point, you'll see a few different approaches from coffee companies.
Standard Approaches to Leasing and Selling
Commercial Coffee Machines
The Discount Then GougeA cynical approach...the coffee company will offer a massive discount (50% or more) or loan you the coffee machine for free, which is a
fantastic start. In order to qualify for this deal, though, you're asked to sign a coffee supply agreement that requires you to buy a fixed
amount of very expensive coffee of indeterminate quality every month. It's not uncommon to see a company charge £25/kg for coffee
they paid £4/kg for, and the client has to keep buying a minimum amount of coffee each month for 3 - 5 years whether they need it or
not. The coffee machine company loses money on the machines but hopes to earn it back over time with exceptional margins on coffee.
In the worst case, many clients end up stockpiling cases and cases of rubbish coffee in the pantry. This is how pod machine contracts
work, incidentally.
This can be dangerous for the coffee company as well if, for example, there's an economic downturn and dozens of clients need to
break their contract suddenly. The distributor is forced to take back loads of expensive used coffee machines, which they're still making
payments on, and there's suddenly no more income coming in from coffee sales.
The Win WinSimilar to the Discount then Gouge technique with some crucial differences. The coffee company will
discount the machine down to their cost - typically a 20% reduction - in exchange for the client
signing a flexible supply exclusivity contract. In this case, the supply agreement asks the client to buy
all their coffee from the coffee supplier, but the prices are fair, the coffee is excellent, and there are
no minimum orders. This is our approach.
It ensures that our business remains sustainable even if the client falls on hard times, it doesn't
unfairly and restrictively burden the client, and it makes sure everyone's incentives are aligned. It's a
real win win.
The Full Price Lease
The simplest lease approach...the coffee machine company
will pull together a lease agreement for you at full retail
price and that's it. The client doesn't get a discounted coffee
machine, but she's not locked into a long-term coffee
supply contract either. Once the lease agreement is done,
the client can buy her coffee from whomever she'd like,
though the original distributor of course hopes she'll buy
from them. We do this sometimes when it makes sense.
The Outright Purchase
Exactly the same as the Full Price Lease, except it's an
outright purchase. You pay for the full machine up front,
and the transaction is complete. Benefits include a lower
total spend (25 - 35% savings over a 3 - 5 year lease) and
less admin and paperwork to deal with. We also do this on
occasion.
Which Approach is Best?This is how the four approaches compare over the course of
three years. In this example, I've used a WMF 1500 S coffee
machine running through 20kg single origin Fairtrade coffee per
month, which is a pretty standard configuration for a medium
sized office.
It's important to note that while coffee machine leases are tax
deductible, outright purchases are not. Therefore, because every
£10 spent on a machine lease reduces your tax bill by £2, it's like
an automatic 20% discount. That's reflected in the sums below.
As you can see, the Discount then Gouge model looks like a fantastic deal up front, but you end up paying about 30% more over the course of
three years. Likewise, outright purchase saves money on leasing costs, but without a supply agreement in place, and because of the tax
incentive mentioned above, the machine ends up being more expensive, and the client is still paying the same amount for her coffee.
One More ApproachWhat if the client wants to buy a machine outright AND sign
a supply agreement? That's actually a pretty good option as
well, and involves less paperwork.
At Honest Coffees, we're happy to help with any of the last
four approaches to the right, but we'll never charge an
extortionate amount of money for rubbish coffee then force
you to buy it.
How Do Commercial Coffee Machine Leases
Work at Honest Coffees
Enough of the theory, professor. How does it
actually work if I want to lease a commercial coffee
machine from you?
It's very much like leasing a car, actually, and there
are a total of 18 steps to the process (we counted!)
once you've told us you'd like to lease a coffee
machine. It all looks very complicated, but it's our
job to make it as seamless as possible for you, and
you only have to deal directly with six of the steps.
1. Honest Coffees prepares a quote 10. Delivery & install dates confirmed
2. Client is happy with the quote 11. Water filter ordered for delivery
3. HC requests contacts leasing co 12. Coffee sent out for delivery
4. All info to the leasing company 13. Ancillary items out for delivery
5.Lease documents ready to sign 14. Coffee machine delivered
6. Client signs lease documents 15. Coffee machine is installed
7. Client posts the lease docs back 16. Client posts delivery acceptance form
8. Client signs coffee supply agreement 17. Leasing company pays Honest Coffees
9. Honest Coffees orders the machine 18. Honest Coffees pays machine company
18 Easy Steps
1. Honest Coffees Prepares a QuoteFirst you need to pick a machine, of course, and you've got your choice of
three different types:
● Bean to cup commercial coffee machines
● Barista style espresso machines
● Commercial filter coffee machines
Once you've decided which coffee machine you want, we'll do the sums for
what it's all going to cost and transform that into a monthly lease estimate. As
a rough rule of thumb, you'll want to take the total price and multiply it by 1.24
and divide it by 36 for a three year lease. For a five year lease, multiply the
total price by 1.37 and divide it by 60. So for example:
● Total price: £5,000
● Multiply by 1.24: £6,200
● Divide by 36: £172 per month for a three-year lease
What all goes into a quote? Not just the machine, it turns out. There are
extra things you'll want to look out for:
● Water filter: you need this to make sure the water going into your
machine isn't full of limescale
● Milk cooler: if you're getting a machine that makes milk drinks like
cappuccino and lattes, you'll need something to keep the milk cool
● Cleaning tabs and fluids: coffee machines are finely tuned
animals, and they need regular cleaning
● Delivery and installation: having a super nice professional coffee
machine is no good if it's not set up properly
● Lease admin fees: the leasing company charges an initial admin
fee and an annual fee
● Extended warranty and service plan: all our coffee machines are
covered for at least a year, but if you want three-year's full cover, it
costs extra
1. Honest Coffees Prepares a QuoteThe quote for your coffee and coffee machine will look
something like this except with actual words and
numbers.
The quote is indicative here and will be finalised once
the lease company does credit checks, but it's rarely
more than 5% - 10% off.
This is also where we'll discuss things like machine
availability, delivery lead times, and ask if you'd like to
sign up for coffee ground recycling.
2. Client Approves the QuoteYou'll review the quote ask questions, and we'll adjust things
as needed before moving forward.
That leaves the dreaded admin fees. If you're doing a lease,
the leasing company charges £130 to set up the lease and
£40 per year to maintain it. There's nothing we can do about
this, unfortunately. You can choose to either pay the fees up
front or roll them into your lease.
At this point we'll get you started with one of our patented
commercial coffee machine lease worksheets to make sure
everything stays transparent, and we all know where we are
in the process. It looks something like this.
3. Quote Request to the Leasing CoOnce you've let us know you'd like to go ahead, we get in touch with the leasing company to underwrite the lease for your coffee
machine. They'll do basic credit checks to make sure your company has been around for a few years, and--ideally--come back to us
with a formal quote within a day or two.
4. Lease Company Has the InfoIf the credit checks aren't straightforward, the leasing company will get in touch with you directly for more information. This can happen
if you're a new company, or your company's credit isn't as good as you'd like. They can usually work something out, but they may ask
the company directors to guarantee the lease payments. This is where most leases hit a standstill, because it can be quite tedious
tracking down the forms they may ask for.
5. Underwritten Quote is ReadyThe leasing company will prepare a formal underwritten lease for you to approve and sign.
6. Review the Lease and Sign It
Have a look through the lease to make sure everything is clear
and acceptable. They'll almost never change any of the terms,
and many of the scary-sounding ones are formalities that you
don't have to worry about, but it's important that you're happy
before moving forward.
7. Post the Lease Back
If you are happy with everything, you'll
need a company director to sign the
lease and post it back to the leasing
company before we can move ahead
with your coffee machine. Once the
documents arrive, we can move
forward.
8. Sign the Coffee Supply AgreementIf you've decided to get your coffee from us as well (remember you'll get 20% off
your machine if you do), we'll send over a coffee supply agreement for you to
review and sign. Unlike the lease, just just needs to be signed and scanned
back in. No need to put it in the post!
Key elements of the supply contract include:
● A fixed duration, usually the same as the machine lease
● A fixed price, that can only go up (or down) if the underlying price of
coffee changes
● A guarantee that you'll always have at least three coffees to choose
from
● No minimum orders; you just need to agree not to buy from anyone else
Once this and the lease documents are signed and returned, that's the hard
work done! How does Honest Coffees compare?
9. Honest Coffees Orders the Machine
Once all the forms are signed and everything's legal, we'll place
the order for your coffee machine.
10. Delivery & Install Dates Confirmed
At this point, we'll be able to give you an exact
date for installation and delivery. The coffee
machine companies will give us an idea of dates
before now, but they won't commit to a precise
date until the coffee machine is actually ordered.
11-13. Smaller Bits Get Delivered
11. Water filter ordered for delivery
All our commercial coffee machines (except the
filter machines) require a water filter, and we
need to order this separately. Nothing for you to
worry about, but be aware that the water filter
for your coffee machine will turn up in a
separate box.
12. Coffee sent out for delivery
If you've ordered coffee from us as well, we'll
send it out to arrive a day or two before the
machine is installed. This ensures (a) the
machine can be set up properly and (b) you're
not left staring at an empty coffee machine
waiting a few days to put something in it.
13. Ancillary items out for delivery
Same thing as the coffee. If you've ordered tea,
chocolate powder, coffee cups, stirrers, sugar
or anything else, we'll make sure they arrive
before the machine does.
14. Coffee Machine is Delivered
The coffee machine company will aim to deliver your machine a
full two working days before they send an engineer to install it.
This ensures it's definitely there in time in case something bungs
up the delivery (wrong address, protests in Calais, etc). Make
sure you tuck it away safely and that the installation site is ready
for the engineer when he arrives. You'll get a document letting
you know exactly what you need to do to ensure the site is good
to go.
15. Your Coffee Machine is Installed
The big day! An engineer will arrive to install
the coffee machine in your office, coffee
shop, pub, secret lair, or hot air balloon and
teach you and your staff how to use it. This
typically takes a couple hours depending on
how complicated your machine is.
16. You Post the Delivery AcceptanceOnce the machine has arrived and is in good
working order, we'll ask you to sign and post
back the delivery acceptance form the leasing
company gave you. This lets them know
you've got what we promised you, and you're
happy with your machine.
Importantly, the lease company doesn't pay us
until you do this, so we're out of pocket until
you post the form back. Please do this
promptly!
17. Honest Coffees Gets Paid
Hooray, we get to pay our mortgage and feed our children!
17. Honest Coffees Pays the Machine Company
Ideally this happens after we've been paid, but sometimes we
have to pay before we get paid, which is a bit of a shame.
If this hasn't put you off getting a coffee machine for your office or coffee shop, please do get in touch!
www.honestcoffees.com@HonestCoffees
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