When buying a coffee machine for a business, there’s a few different contract types you can consider. Today we are talking about free on loan contracts, and why you may or may not want to consider them for when you’re looking to buy a new piece of coffee equipment.
What is a Free on Loan Coffee Contract?
A ‘Free on loan’ contract is exactly what it sounds like. You, the owner of a business, is loaned a coffee machine free of charge by a supplier like us.
Rather than buying the machine outright from us or paying monthly, a ‘free on loan’ machine would be given to you free of charge. How we make a profit is by charging you higher prices on your consumables, think: coffee beans, takeaway cups, sugar, syrups etc. So, in effect you would still be paying for the right to use the machine, you are instead paying for it indirectly through more expensive coffee beans, rather than paying directly for the machine itself.
What are the Benefits of a Free-on-Loan Coffee Machine?
So, the big upside with free-on-loan is that you can avoid the large upfront cost of equipment. In fact, you can avoid the price of the machine hitting your “books” at all. You won’t have to pay the full price of the machine, instead, you’ll be paying for the machine slowly over the length of the contract. This can be helpful if you’re running on a tight budget and a low cash flow.
The other perceived positive is that if your sales drop, you’re not stuck with a regular payment because you’re just paying for the consumables. At least that’s how it appears on the surface. So what are the downsides?
The Downsides to Free on Loan
Many suppliers have stopped offering free on loan contracts after noticing a number of downsides for their customers:
1. High price of consumables
The number one reason is that the price of your consumables is so highly inflated. That’s not a greedy choice on the part of the supplier. They’ll still have to cover the costs of the machine, it’s service and it’s maintenance. How else can they cover those costs if the only thing you’re paying for is your consumables?
2. You’ll be Tied into Buying from One Supplier
To make this work, you will need to buy everything from the machine supplier, and this will be stated in the contract. “So okay, I’m getting a free coffee machine, why is that a big deal?”
Well, this can have a knock-on effect as no matter how much you’re buying, it will always be charged at the inflated rate.
3. Machine Cost Rises with Consumables
Let’s imagine you’re paying £16/kilo for coffee on a free on loan contract. The reality might be that the actual price of the coffee is £6/kilo and £10 is going towards the machine. At 10 kilos a week that’s £60 on coffee and £100 on the machine.
Now imagine down the line you get a very busy few months and your coffee sales have doubled. All of a sudden, you’re now effectively paying £120 on coffee but £200 towards the machine each week. Simply because your sales have gone up, the machine is now costing you proportionally more money. Because the price of the machine is factored into the coffee, the more coffee you serve, the more the machine will cost you in real terms.
On the flipside of that, if you’re quieter than expected, sales are down and you’re not buying as much coffee, you might assume that you’ll be paying less for your machine.The supplier will always want to protect themselves from this.
4. Minimum Thresholds
A common way of doing this is by including minimum thresholds in the contract. This can look like shortfall charges, in which you cover the costs of the machine by paying the difference. Or it can look like contract extensions, meaning you’ll spend more time under contract until you pay back the cost of the machine. Either way, the net result is that you will eventually pay the required amount for the machine.
5. Low Quality Coffee Equipment
Another common method for the supplier to protect themselves from risk is to minimise their initial investment on the equipment.
That is why free-on-loan commonly involves already used or under-spec machines. If you’re not paying for any machines on paper, they have free reign to install a machine that’s coming to the end of its life. Not only does that risk getting a machine unsuitable for your needs, but also increases the risk of breakdowns and faults.
6. Hidden costs
Something else you might run into are hidden costs. Coming back to the same cause, you’re not paying directly for the running of the machine and only paying for your consumables. So when you run into issues with machinery or parts, these are areas where the supplier can regain its costs.
There may be additional costs outside of your contract, for example water filter changes and boiler inspections. All of which are essential to running the machine and can be very costly, and are another means by which the supplier can squeeze out more profit.
7. Service Quality and Training
Worst of all, it may be that you are offered a free on loan contract where none of these apply. The real danger of this is that these contracts can become unprofitable if the spend is not what was anticipated.
Something has to give, and the first thing is typically the service of your machines. If you’re no longer covering the costs through your consumables, it becomes unviable for them to continue servicing your machines and training your staff.
Summary
So having been sold on the promise of a “free coffee machine”, if you start buying either too little coffee or more than anticipated, you’ll quickly start to realise where the costs were being covered.
A great analogy for the downsides of free-on-loan is if you were going to buy a car in the same way. Rather than paying for the car directly, you’d be obliged to buy petrol from the dealership who charge much more than your local BP or Tesco’s.
The more you drive, the more inconvenient and unaffordable this becomes, but you’ll also be charged if you don’t drive enough. Suddenly the idea of a “free car” becomes less attractive, and that’s before you discover that it’s already heavily used and doesn’t perfectly meet your requirements.
Alternatives to Free-on-Loan Coffee Contracts
So, there are a number of alternatives to free on loan, especially if the main selling point for you was to avoid that initial upfront cost.
You can also achieve that with a lease purchase, lease rental or direct rental contract. These all have their own best use cases, but as the cost of the machine is set in stone, these contracts avoid many of the downsides we’ve discussed about free-on-loan.
Can Free-on-Loan Contracts Work?
If you have read this far and are still sold on the idea of a free on loan machine, there’s plenty of suppliers out there who would love to hear from you. If you do decide that free on loan is best for you, please make sure that:
- There is a minimum servicing agreement and you have clarity on any hidden costs
- You are aware of any shortfalls or thresholds built into the contract and they are realistic.
- The coffee machine itself is of high quality, meets your requirements and can support you over the next 5 years.
- And most importantly, make sure you are happy with the coffee and that there is a guarantee in place of the quality you’ll receive.
And now for the pitch…
if you’ve learned something new about free-on-loan contracts today, there are plenty of other finance options available to you. All of which avoid many of the negatives we’ve discussed. There’s a link in the description of this video that will take you to a deep dive article on our website. If you want to have a chat a new coffee machine or finance options, feel free to speak to us at BCR.