Cafe2U franchise finance
Getting approved for finance for a Cafe2U franchise
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If you'd love to head out on the road and give busy workers their daily caffeine fix, a Cafe2U franchise could be the perfect business model for you. Read on to find out more.
The Cafe2U mobile coffee franchise system began in 2004 and has shot straight up since then. Cafe2U is a mobile coffee van business, with hot and cold espresso-based beverage sales making up more than 75% of a franchisee's sales. In addition to hot beverages, Cafe2U franchisees can offer a range of fruit smoothies, frappés and other iced drinks along with a selection of sweet baked products, hot savoury baked products and individually-wrapped sandwiches, rolls and wraps.
As with other mobile coffee van systems, Cafe2U franchises have relatively low start-up franchise costs compared with other potential business models, mainly due to the lack of overheads and lack of permanent retail or office space required. A Cafe2U franchise would suit someone who loves getting up early and who enjoys chatting with businesspeople while satisfying their daily need for a caffeine fix. If you think a Cafe2U mobile coffee franchise could be the right choice for you, read on to find out everything you need to know about the franchise model and how to finance your new business.
Costs and profitability
The initial costs for a new Cafe2U franchise come to $137,500. Of that, $12,500 is GST which can be claimed back as a tax credit on your first business activity statement, although you will need to wear the cost yourself in the meantime.
This initial franchise set-up fee includes a Cafe2U Mercedes-Benz Vito van, along with all costs relating to the initial van fit-out, initial stock and other supplies. The initial fee also includes the franchise investment fee.
However, the initial franchise fee does not include working capital, and most lenders will not allow for working capital when offering finance towards purchasing a franchise business. Cafe2U franchisees are recommended to have at least $2,000 available as working capital at the outset.
The initial term of the franchise agreement is five years with an option to renew for a further five-year period upon the expiration of the first term.
As with all franchises, Cafe2U franchisees are liable to pay ongoing fees while running their business. However, while most franchises charge royalties as a set percentage of ongoing sales, Cafe2U franchisees pay a set fee as set out in the franchise agreement, which is currently $160 plus GST per week. The weekly amount covers ongoing franchise fees and royalties and is a fixed amount for the full ten years of the franchise agreement, except for annual adjustments in line with CPI increases.
In addition to the set weekly fee, all franchisees are liable to pay a weekly contribution to a joint marketing fund. Currently set at $25 per week, each franchisee's marketing contribution goes towards a compulsory fund the Franchise Advisory Committee manages, a group of five franchisees elected to act as a combined marketing voice on behalf of all Cafe2U franchisees. The marketing fund must only be used for marketing initiatives that benefit all Cafe2U franchisees. In the past, it has been used to fund national campaigns, including those on radio and television.
Other costs to consider
Insurances are vital for any business, and a mobile coffee van is no exception. Cafe2U franchisees are required to hold $10 million product liability insurance as well as $10 million of public liability insurance. In addition, comprehensive motor vehicle insurance is a strict requirement, including insurance covering fixtures and fittings, all other equipment and the vehicle itself.
The Cafe2U franchisor offers a group insurance policy for all franchisees, with annual premiums ranging between $1,500 and $2,500 depending upon the franchise location and the specific items to be included for cover.
Some Cafe2U franchisees also take out equipment breakdown insurance and/or business interruption insurance, but these are optional.
In addition to the various insurances, Cafe2U franchisees are responsible for the routine coffee van servicing and maintenance, as well as their espresso equipment, power generators and other equipment.
Another cost to consider when considering a Cafe2U franchise comes with the possibility that, after the initial five-year franchise agreement term, you may be required to upgrade fixtures and fittings or other equipment before you can be considered for another five-year renewal. These requirements are at the franchisor's discretion and may also include updating your vehicle branding in line with the current branding and colour schemes the franchisor chooses. All changes and upgrades costs are the franchisee's responsibility and must be completed before your franchise can be renewed for a further five years.
One of the reasons that Cafe2U – and mobile coffee van franchises in general – have proven to be a successful business model that has stood the test of time is because it combines high gross-profit products with minimal operating costs. As such, the franchisor estimates that franchisees receive a net return of 40-55%, depending on their individual circumstances.
In addition, Cafe2U guarantees that franchisees will bring in at least $500 in gross sales every day during a new franchise launch period as specified in the franchise agreement. Recognising that new franchisees will take some time to learn the ropes, understand how the business model works and build up their reputation within their allocated territory, Cafe2U commits to make up any differences in daily revenue to ensure earnings of at least $500 per day. Following the initial launch period, Cafe2U managers work with franchisees to develop short-term business plans to assist in maintaining the $500-daily gross income benchmark.
Independent figures based on a survey of Cafe2U franchisees estimated an average franchise turnover of $150,000 for the financial year ended July 2009. Considering the relative age of these figures, it appears to be in line with the current $500-per-day gross sales standard for Cafe2U franchisees.
Cafe2U loan options to consider
Cafe2U does not directly provide finance to franchisees, but it has an existing relationship with the Commonwealth Bank and possibly other major Australian lenders.
While an established relationship with a lender is certainly an advantage when it comes to applying for finance for a new franchise, it will only take you part of the way. You will still need to satisfy the lender that the investment is a good one, that you are capable of building and running a successful business and that you will be able to service the loan repayments easily.
The following finance options may be available to you:
- Unsecured business loan. Unsecured business loans typically have repayment terms of up to five years. Lenders will want to see proof that you have brought in significant revenue through a business over a certain period. The upside is that you will not need to have residential property to offer as loan security. Loan amounts will vary between lenders but tend to be up to $500,000.
- Secured business loan. One of the most common finance choices for people looking to start a new franchise is a secured business loan. This type of loan structure requires applicants to have an appropriately valued residential property to offer as security for the loan amount. Lenders will typically offer 70-80%, with loan amounts potentially as high as $5 million. Loan terms tend to be between 25 and 30 years. Some lenders will require additional security for the loan and may ask for a fixed and floating charge over commercial property, a director's guarantee and/or an external guarantor for the loan.
- Franchise loan. Franchise loans are generally only available for the purchase of franchise businesses that are both accredited and reputable. A franchise loan can involve a lower amount of equity or a smaller deposit, giving it an advantage over secured or unsecured business loans. In addition, franchise loan terms can be more flexible than that of a business loan, but the loan term will unlikely be longer than the initial term of the franchise agreement.
Do I need any other equipment to run a Cafe2U franchise?
Yes. Potential Cafe2U franchisees need to consider where the coffee van vehicle will be stored and maintained outside of normal trading hours, particularly taking into account that the vehicle must be powered at all times. To maintain the vehicle's refrigeration, the vehicle must be stored within easy access of a 15-amp power outlet.
In addition, some Cafe2U franchisees have a dedicated refrigeration system at home to store excess stock and thus reduce the frequency for orders. This is not a requirement but would be an advantage for a franchisor.
Do I own my vehicle and other equipment, or is a part of a long-term lease?
As part of the franchise agreement, all Cafe2U franchisees purchase their coffee van vehicle and other equipment outright. This gives the franchisee saleable assets should they wish to discontinue their franchise business at the end of the term of their franchise agreement.
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