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