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Coffee Franchise Finance
Do you have a passion for coffee? So does the rest of Australia! Make everyone's work days a little bit brighter by starting your own coffee franchise.
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There is no doubt that Australians love their coffee. This Aussie devotion to caffeine is partly down to the satisfying experience of drinking a good coffee and partly due to the social aspect that comes with "cafe culture".
If you're passionate about coffee and would love to share your passion with the world – or with your local area, at least – read on to find out how to obtain finance for a coffee franchise of your own.
Costs and profitability
How much does a coffee franchise cost in Australia?
Coffee franchises tend to come in two distinct flavours: mobile coffee vans and fixed-location cafes. Understandably, the initial cost for a coffee van differs significantly from that of a full-service cafe.
Example initial costs of a coffee van franchise:
- Cafe2U requires an initial investment of $130,000.
- The Coffee Guy will have you on the road after a $50,000 initial investment. This includes a $43,000 franchise fee, a van bond of $6,000 and working capital.
Example initial costs of a cafe franchise:
- Ferguson Plarre Bakehouses is a full-service bakery cafe franchise needing an initial investment from $250,000.
- Hudsons Coffee is an Australian staple and requires at least $350,000 as an initial investment.
- Mrs. Fields Bakery Cafe may be more about cookies than coffee, but it's one that still firmly falls within the coffee franchise industry. Costs for a Mrs. Fields vary between $249,900 and $349,000.
- Drive-through concept Muzz Buzz may be the perfect hybrid between a coffee van and a fixed-location cafe and costs $300,000 in start-up franchise fees.
- The Coffee Club is considered coffee elite and requires an initial investment ranging between $450,000 and $750,000 depending on location and other factors.
What other costs do I need to consider?
The majority of franchise arrangements include ongoing royalty and support fees, which can either be calculated as a percentage of your revenue or at a fixed rate.
For example, a Hudsons Coffee franchise will incur an 8% royalty fee on all sales in addition to a 2% marketing contribution fee.
In another example, Xpresso Mobile Cafe operates using a fixed fee structure. For the first three months franchisees pay $50 per week + GST, months four and five incur a $100 fee + GST and month six incurs a $150 fee + GST.
Other costs associated with purchasing a coffee franchise can include:
- GST. If you buy an existing franchise that is already operating, GST will not be payable on the purchase price. On the other hand, when setting up a new franchise you will need to pay GST at the usual rate of 10% on the initial franchise fee. You can claim the amount paid as a credit on your first business activity statement but will need to wear the cost in the meantime.
- Legal costs. Remember to factor in your own legal costs incurred in purchasing the franchise. Check the franchise agreement carefully as some franchisors will also pass on their legal costs to the buyer.
- Working capital. Even after you have purchased your franchise and paid all the initial costs, you will still need cash on hand to finance the ongoing operation of your new business. This is referred to as working capital and it is a franchise expense that is often forgotten by new franchisees.
How profitable are coffee franchises?
As with other franchise opportunities, coffee franchisors will never state a guaranteed income or profit level as much of the profitability comes from the hard work and determination of the franchisee.
What has been said about coffee van franchises, however, is that franchisees clock up shorter hours than other small business owners, with the majority working five days a week from 6:30am until 1pm. Franchisees who are willing to extend their working hours until 3pm each day are said to potentially earn an additional $15,000 per annum for their efforts.
Finding finance
What options do I have for financing a coffee franchise?
Options for purchasing a coffee franchise include:
Franchise loan
A franchise loan is very similar to a standard business loan, the major difference being that a franchise loan allows a greater amount to be borrowed against the value of the business than if you are purchasing a non-franchise business. As such, a smaller deposit or a lower amount of equity will be required when applying for a franchise loan as opposed to a regular business loan. Note that the value of the business will be determined by the bank and may not correspond with the agreed purchase price. Franchise loans usually range between 50 and 70% of the franchise cost. The term of the franchise loan is directly related to the term of the franchise agreement, which is generally between five and ten years and therefore shorter than a standard business loan term. The loan amount will cover all aspects of the purchase and initial set-up of the franchise but will not include working capital.
Franchise loan with franchisor on lender’s approved list
Most major lenders in Australia have a franchise accreditation program, which is a list of franchisors that they perceive to be strong, low-risk business opportunities. While banks update their lists of approved franchises regularly, if you can identify a suitable lender you could potentially borrow up to 70% of the loan amount.
Business loan
A business loan requires residential property as security and has a standard loan term of 25 to 30 years. With an appropriate residential property as security you can potentially borrow up to 100% of the value of the loan.
Low entry franchise finance
It may sound counterintuitive but it can be difficult to obtain finance for a franchise with a low entry fee. Some franchises, particularly those based on the provision of mobile services, like a coffee van, have a lower initial investment, making it difficult for potential franchisees to obtain finance. When it comes to franchise loans with a franchise that is on the lender’s approved list, a minimum initial investment of $250,000 is not uncommon. In this instance, a personal loan may be a better choice.
Savings or equity
While most people will need to borrow money to finance a new franchise, consider any savings or other liquid assets you could use rather than going into debt. You could also consider refinancing a residential property mortgage to free up some of your equity to purchase your franchise.
Family or personal finance
If you have a family member or friend who would be willing to lend you the money required to start up your new franchise, this could be an option to consider. However, ensure that any agreement is drawn up properly and that all parties are clear on the terms, including interest rates and the repayment schedule.
Franchisor finance
While not available in all types of franchises, some franchisors have recognised that potential franchisees are finding it difficult to obtain finance from banks and other major lenders. Some franchisors may provide other options to frustrated potential franchisees, including direct lending, stepped royalty payments and other schemes. Ensure you received independent legal advice before entering into a franchisor finance agreement.
Compare these business loan options
What should I consider when comparing my financing options?
- Loan term. Remember that the loan term of a franchise loan is linked to the term of the franchise agreement, whereas the loan term of the business loan can be up to 30 years.
- Personal savings. Consider how much, if any, of your own personal savings you are willing to invest in a new franchise.
- Loan amount. Will the amount of your loan be more than the minimum required for a franchise loan or business loan? If not, consider a personal loan.
- Residential property. Are you willing to offer your residential property as security for a business loan? Alternatively, would you refinance your mortgage to free up your equity?
- Interest rates. Compare interest rates between lenders and weigh this against other loan terms.
- Approved franchises. Which lenders, if any, are actively looking to finance coffee franchises?
How do I get approved for finance?
If you are purchasing an existing coffee franchise, you will need to provide fully audited financial statements of the business for at least the last two years. This will include business bank statements, profit and loss statements, and business tax returns.
For a new franchise, you will need to provide financial information for yourself for at least the past two years. This will include your audited tax returns, payslips if you are an employee, or business financial information if you are self-employed.
You will also need to provide a business plan for the franchise, including projected sales and profits and cash flow forecasts.
In addition, update your CV to ensure that it contains all relevant business management experience along with any experience you have had in similar areas.
Once you have determined that your passion is enough to make you want to bring excellent coffee to the world, you then need to decide whether a coffee van or a fixed-location cafe will be the best franchise for you. Each option has its benefits, though the start-up costs of a coffee van franchise are considerably lower than a cafe.
Pictures: Shutterstock
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