In this article, we explore how a free on loan arrangement can cost you as much as $40,000 over 8 years.

Cafe owners

Joe and Sally: two different type of cafe owners

“But, Joe, that makes no sense. Why would you want to pay for an asset that you will never own?” Sally’s frustration was quite palpable. She couldn’t understand why Joe would want to pay a higher price for his coffee, forever.

“Joe, for year 1 both P&R and 9 KM’s offers are the same. The difference is that P&R is encouraging you to finance your own machine through their partners. 9 KM will give you a “free on loan” machine but charge you a higher coffee price. You are paying for their machine. With P&R, your cost will keep coming down each year and after year 4 you will have paid off your equipment. Your profitability and cash flow will improve each year and then from year 4 onwards it will make your cafe significantly better in financial terms.”

“Sure...but what if my average kgs per week drop?” Joe quipped. 

“Why would they? You are a great operator. Okay, let’s even assume they do drop and you end up paying a bit more, effectively, in some of the years. You will still be much better off overall under the P&R model. Also, have you considered the reverse? What if you get busier and your average kgs increase? Under the 9 KM model you will end up paying even more. Whereas under the P&R model, you will be rewarded for your hard work and success”

“I am not buying it, Sally. Why should I take on this finance? When with 9 KM they just give me a machine” Joe said with a finality in his tone.

“You don’t understand, Joe. You are already committing to a cafe lease, to staff, to a business loan-- taking another commitment won’t increase your risk. In fact it will make it easier for you to meet your other commitments. 9 KM is not just giving you a machine. They are charging you for it. Why can’t you see that? Do you want me to show you on a spreadsheet?”

“No, Sally. I know what I am doing. Maybe we can agree to disagree” Joe said, wanting to end the conversation.

“Sure.” was all Sally could muster.

Coffee machine

Joe learns spreadsheet skills

Many years after this exchange, Joe was finding it hard to keep up with the rising costs of everything that is needed to run a business. Trying to figure out how to keep his rising costs at bay he quickly signed up for the “Accounting skills that each cafe owner must know” course when an advertisement popped on his screen. The course was great and he learned so many things including some spreadsheet skills. His mind suddenly went to this conversation with Sally all those years ago. He wanted to see for himself how things might have been if he had chosen a different model.

Once he had put all the numbers in, he couldn’t believe his eyes. How could he be $40,000 worse off! That made no sense! He checked everything multiple times and even asked his course instructor to take a look. The numbers were correct, after all. As the reality sank in, he wished he had chosen a different path. He wished he had listened to Sally. He didn’t know what to do now. But the first thing was to call Sally and apologise.

Cafe owner

Next steps

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