The best loan structure for café owners who also own a house
For most Australian’s, owning a home is the biggest financial decision they’ll ever make. And there’s a good chance it will also be the single largest asset they ever own.
But as a café entrepreneur, your number one asset is your business. Which means that if you own your home, or plan on buying one, you’ll probably need to borrow money to buy it.
This means how you structure your loan could be the difference between success and failure.
Mike and Jane’s story
Mike and Jane were married, and both worked at a local café. They dreamed of running their own café, and so when their boss gave them the chance to invest in a new café he was opening they immediately said “Yes”.
Problem was, they’d purchased their home just a few years earlier, and the loan amount was still quite high. But it was an opportunity they couldn’t pass up, and so they took out a business loan to fund the new café venture.
Because the loan wasn’t secured against any asset, the interest rate was quite high. However, the real problem was that they’d mixed their business and personal loans.
Everything went smoothly to begin with. But after a few staffing issues and a decline in sales, the business’ cash flow became a real problem.
They both reduced their salaries to give the business a much-needed financial boost. But that meant they could no longer keep up with their home loan repayments. Unless they came up with a solution quickly, they faced the prospect of having to sell their dream business.
What they should have done
Now let’s see how different things could have turned out if Mike and Jane had borrowed the money for the café using a different loan structure.
What they should have done is set up the loan with two accounts: one to purchase the house (using the house as security, and the other for future investment purposes. That way each loan repayment would have increased the difference between what they owed (the loan) and what they owned (the house).
And what would have happened when the opportunity to purchase the café came up? With the home loan repayments lowering their loan-to-value ratio (LVR), they could have used the second loan account to buy the café.
By having two accounts (rather than mixing business and personal loans), Mike and Jane would know exactly what the repayments for the ‘business’ portion of their loan would be. The café’s profits would have also grown, giving them the option of either increasing the repayments on their home loan or investing the extra money.
A happy ending
Fortunately, Mike and Jane didn’t lose their café business. Because they were so far ahead with their business and mortgage repayments, the bank gave them a six-month grace period where they only had to make interest payments on their loan. That gave them the chance to grow their business and improve its cash flow.
But having the right loan structure from the start would have helped them not only survive the downturn in their café, but also take advantage of future opportunities as it became more successful.
As you can see, making the right decision at the start can really help you down the track. So, if you have a home loan and want to invest in a café as well, get in touch with us so we can talk about the loan structure that would work best for you.
Buying your café premises: How to have your cake and eat it too
As we mentioned in our last blog post, superannuation can be a fantastic asset for café entrepreneurs like you.
One of the keys to growing a business is to use its income to create and buy assets that help generate that income. And a great asset for any business to own is a commercial property such as a factory, office or retail outlet. Not only can they provide great cash flow, they can also provide some fantastic benefits.
My guess is you know of at least one commercial property that generates a great income. In fact, you may know exactly how much income it generates because your business pays it every month.
Buying the premise where your café is located is a great strategy for any café entrepreneur. And chances are you can use your superannuation fund to do it.
If you’re running your own café, or have just sold your business, this strategy gives you not only the benefits of owning a solid asset but also some amazing tax benefits. Here are just two advantages of buying your café’s premises using your superannuation fund.
- You can potentially reduce your Capital Gain Tax when selling your café
Whenever you buy and subsequently sell an asset (such as a business), you want to make a profit. So, you want to sell the asset for more money than you paid for it (or contributed to it while you had it).
When you sell a business in Australia, you can roll over (contribute) some of the money you get from the sale to superannuation. This will in turn reduce the figure used to calculate the ‘sale price’, and can potentially reduce the amount of Capital Gains Tax you need to pay.
- The income you receive from the property is taxed at a lower rate
Having the superannuation fund own the premises your café runs from means the rent your business pays goes into the fund. But as we mentioned in an earlier blog post, superannuation funds in Australia pay only 15% tax on income. This a lot less than individuals pay—up to 49.5%. And the money you save on tax can be used to grow your asset base even more.
Buying your café premises is a great move. It can reduce both the tax you pay now and the Capital Gain Tax you’ll have to pay when selling your business. And the rent your business pays will be going into your pocket rather than someone else’s.
If you’d like to know more about using your superannuation to buy your café premises, get in touch with us today.
And hopefully we can visit your place soon.
The long-term benefits of superannuation for café entrepreneurs
Ah, superannuation. The word alone is enough to invoke apathy in small business owners—if not downright resentment.
Especially when those small business owners are café entrepreneurs.
But superannuation doesn’t have to be like that. You may even learn to love it. It’s a fantastic asset that can help you create financial freedom using your café business.
A tale of two café owners
Paul and Michael were both café entrepreneurs. They both ran three cafés, and had teams that fluctuated around the 40-person mark. So as you can imagine their quarterly superannuation payments were quite large.
But the two men had quite different opinions about it.
Before starting his first café, Paul worked at a local restaurant. And while he was there, one of his managers referred to superannuation as “a compulsory long-term savings plan”.
Paul liked that idea. And when he started running his first café he continued putting money into his superannuation.
It was tough to begin with. Paul wanted to keep the money—for his business as much as for himself—but he knew it would be worth it in the end.
And it was. Paul’s superannuation balance grew, and allowed him to take advantage of opportunities as they came up, such as buying a property for his next café.
Making the quarterly superannuation payments to his team felt like more of an opportunity than a burden. He even heard some of his staff talking about the benefits of superannuation to the rest of the team. .
Paul’s superannuation was an asset that could help him grow his business now, and achieve financial freedom in the future.
Unfortunately, Michael didn’t share Paul’s enthusiasm for superannuation.
Like Paul, Michael worked at a restaurant before starting his first café. But while Paul’s manager saw superannuation as an opportunity, Michael’s manager shared the same view as a lot of people in the hospitality industry.
“Superannuation is a terrible idea,” he’d say. “It cripples small business.”
So when Michael started his café business he refused to put any money into his superannuation fund. Whenever his bookkeeper mentioned how much superannuation he’d paid to his staff, Michael would shudder and curse. And if anyone on his team had a question about it, he’d brush them aside.
“Here’s the email address of my bookkeeper,” he’d grumble. “Ask him about it.”
As far as Michael was concerned, his business was his superannuation fund. And he’d have plenty of money to retire on once he sold it.
Problem was he didn’t know when (or even if) it would be sold, or how much it needed to sell for. So while he told everyone he was creating his financial freedom, the truth was he didn’t know if he’d have any freedom at all.
And all because he never understood the long-term benefits of superannuation.
How taking risks in your café business can lead to financial freedom
I’m sure most of you have heard of (if not read) Robert Kiyosaki’s Rich Dad, Poor Dad, one of the most famous personal finance books of all time. (For those of you who haven’t, it’s the story of what two fathers in Robert’s life—his own and his best friend’s—taught him about money and investing.)
Well, around 15 years ago one of my friends and I went to one of Robert’s talks. And I can honestly say it put me on the path to financial freedom. By the time it was over I was determined to be my own boss and become financially stable by investing and building businesses.
Yes, I’d be taking a risk. But having heard Robert’s story, it seemed like a risk worth taking.
Unfortunately, it didn’t have the same inspirational effect on my friend. He was content to keep taking jobs, working hard for his bosses, and putting money away for the future when he could.
As I said, that was 15 years ago. Since then I’ve started three businesses, employed team members around the globe, invested both locally and internationally, and bought and sold several properties.
And my friend? Well, he’s still working for ‘the man’ and living in a rental. And the only investments he has are his bank accounts.
A risk worth taking
It might sound like I’m telling this story so I can gloat about my success. But I’m sharing it so you can see how taking risks can be a great thing.
Of course, having taken that first step to becoming a café entrepreneur means you may already know taking risks can lead to greater rewards. But you may be hesitating a little as the fears and doubts start to creep in. Fear of cash flow shortages. Fear of losing a key team member. Fear of losing money on invested in your cafe business.
Believe me, you’re not alone. Every entrepreneur struggles with doubt, including me. In fact, it’s practically a rite of passage.
And I’m not going to say anything like, “Take it easy. There’s nothing to worry about”. It won’t be easy. There will be things to worry about. Your path to financial freedom will be full of obstacles.
But you can get past them. You just need to embrace that fear, get comfortable with being uncomfortable, and strap yourself in for in incredible journey of investing and growing your wealth.
And at the end of your journey you’ll be able to retire early, and reap the rewards of all your hard work.
But in the meantime, just sit back and enjoy the ride. And if you need directions, don’t hesitate to get in touch with us.
Learn the steps to becoming a successful cafe entrepreneur
Some café entrepreneurs seem to have total clarity about their lives. They’re confident, happy, healthy, successful and financially stable. They’re the rock stars of the café industry.
People want to be around them. Work for them. Listen to them. Even be them.
And you know what? There’s no reason why you can’t be one of those entrepreneurs.
Of course, before you can achieve that ‘rock star’ status, you need to turn your café business into a café business that’s successful and financially stable. But how do you do that?
The answers are coming…
In our final blog for 2016 we told you about a couple of books we were working on. The books, which will be published later this year, will show you how to create financial freedom for yourself through your café.
You’ll learn the three stages you need to go through, and the process you need to follow, to be a successful café entrepreneur. Step by step, we’ll show you how you can use your café business to create wealth, make investments, and retire early.
Make no mistake. Running a café business is tough, not to mention time consuming. But it can also be very rewarding. A café business is all about people, and as an entrepreneur you’ll be at the centre of it all.
… and so are the rewards
Once you’ve achieved financial freedom from your cafe business, your life will never be the same again. You’ll always have time to do the things you want, when you want, and with whoever you want to do them with.
Here at Equus Partners we’re extremely goal driven. And when it comes to you, the café entrepreneur, our goal is to help you understand enough about the concepts for you to be able to make the decisions that will move you closer to being financially free.
So keep reading our blog (you can subscribe here) as we continue to share advice from our books that will help you achieve financial freedom.
And get ready to live that rock star lifestyle.
Make your dream of owning a successful cafe business a reality
Close your eyes for a moment, and imagine your life as a café owner in a year’s time. What do you see?
(Well, nothing obviously. Your eyes are closed. But forget that, and let your imagination run wild.)
If business is going well, you may picture yourself as a café entrepreneur. Your investment is running smoothly and efficiently. Every table is full, and people are lining up around the corner to grab a meal, a snack, or maybe just a coffee. And on the wall in your office are your plans and innovations to expand and grow your business even more.
But if your business isn’t doing so well, you may be imagining quite a different scenario. Maybe you’re struggling to keep the doors open, and facing the prospect of losing it all—your business, your pride, and maybe even your house.
Even if your café is doing okay, you may think that first scenario is nothing more than a fantasy. But with the right information and solid planning, you can make it your reality.
The seven P’s of a successful café
Like any business, the aim of owning a cafe is to make a bigger profit, have more cash, and to maximise your return on your investment.
But how do you turn a cafe business into a successful and financially stable cafe business?
We’ve identified seven key business areas you need to get just right to be successful. (We like to think of them as the seven P’s of a successful cafe.) And over the next few months we’re going to share them with you in our blog.
These special blog posts will show you how to make more profit, have more cash, and increase the value of your investment.
You’ve read the blog. Now read the book.
We’re also working on a book to help you make those dreams of becoming a successful café entrepreneur a reality.
By reading Count More Beans – The 7-Step Guide to Making More Profit, Having More Cash and Maximizing the Value of Your Café, you’ll learn the entrepreneurial strategies involved in making your café business a success.
All you’ll need to do is follow our step-by-step guide, keep an open mind, stay motivated, and forget everything you think you know about accountants.
Ready to make your café fantasy a reality? Then keep reading our blog, and stay tuned for an announcement about the book.
Of course, if there’s anything you’d like to talk about in the meantime, don’t hesitate to get in touch with us.
Why you can never stop innovating in your cafe business
As a cafe entrepreneur, what would you do if another cafe with an established reputation opened up across the road?
Would you ramp up your marketing? Lower your price? Or just keep doing what you’ve always been doing.
Here’s the story of what one café owner did. Unfortunately, this story doesn’t have a happy ending.
One man and his café
Sam opened his cafe in a busy inner city suburb of Melbourne. Like many café entrepreneurs, he started it from scratch. And he invested a lot time and money in growing his business.
Sam’s idea of a successful business was one that made enough money for him to pay the bills on time. And he had a simple idea for developing his café business: He’d open the doors each morning, people would come in and buy his coffee, and then those people would recommend him and his café to their friends.
Sounds reasonable, right? But rather than having a plan for future growth and expansion, Sam was happy to just let his business grow naturally and gradually.
And then the competition moved in
One morning, as Sam was writing up the specials board, he noticed a permit going up on the vacant land across the road.
He immediately felt sick to his stomach.
Within a month, there was another coffee shop across the road. But while they may have been new in the area, they were a well-known and established market leader. It wasn’t long before Sam had to contend with not only the new coffee shop, but also its large Instagram following and the smell of freshly roasted coffee beans.
For Sam’s business, it was like getting smacked in the face with a snowball.
His customers were soon heading across the road to see what all the hype was about. And they weren’t coming back.
Sam was already fighting a losing battle with cash flow, which crippled any chance of getting aggressive. And so his profits, which weren’t that big to begin with, quickly became losses.
Unable to make a move against his competition, Sam had little choice but to sell his café business and make a loss on his investment.
What Sam could have done differently
So what went wrong? Quite simply, Sam’s business wasn’t doing enough to survive long term.
Successful café entrepreneurs are always innovating—something Sam wasn’t doing. The amount of research and development café owners do is amazing, and unless you’re consistently evolving your products you’ll quickly be left behind.
One such innovation is for cafés to roast their own coffee beans. But Sam wasn’t doing that, and that’s one of the differences that gave Sam’s new neighbours the edge.
Successful cafes also have a loyal tribe—a group of dedicated people who share a common value. They’re not followers, but rather protectors who will work with and around it. And it’s this tribe that helps a café expand and conquer.
Sam’s business could have survived if he had the right tools, such as the finances to grow his café business. But having survived the first year, Sam probably thought his business was immune to running out of money. Unfortunately, innovating and growing a business takes a vault of capital and constant cash flow.
The moral of the story
In our story, there was no David and Goliath battle because the new café had won the moment it showed up.
You will always have businesses competing with yours. Businesses that are finding new ways to market themselves and steal your customers. Businesses that are developing products to make yours look like yesterday’s leftovers. Businesses that are different, and telling everyone why they’re better.
So never be complacent about your café business. Always be thinking of ways you can make it better for your customers. Because in the end they will become your loyal tribe, and help protect your business both now and into the future.
If you’ll be in the city for the Melbourne International Coffee Expo (MICE), come and say hi as I will be speaking at the Australian Speciality Coffee Association (ASCA) on Monday the 27th of March. It would be great to see you there.
ASCA Symposium – March 27
Are you a café entrepreneur looking to improve your cafe business?
Well then be sure to attend the first Symposium run by the Australian Specialty Coffee Association (ASCA).
This Symposium will cover important topics including how to attract positive attention for your business, simple steps to increase profitability and how to better support coffee producers with your café.
Speakers include, Matt Holden, Robert Mackay, Jos Webber, Stephen Bannister and Nadi Elias and will be chaired by BeanScene editor Sarah Baker.
Be sure to attend, to gain some important tips and advice for your cafe business.
Tickets on sale now.
Your personal finances: Do they put you in the black or the red?
In a previous article we talked about how creating a budget can help eliminate cash flow problems in your business. But what about your personal life? If you always seem to be short of cash, a personal budget may be just what you need.
Now we understand how phrases such as “profit and loss statement” and “cash flow forecast” would be enough to put you off the idea. So let’s forget about those, and use a much simpler term.
Introducing the Net Cash Figure.
Let’s say that at the beginning of the month you check your personal bank accounts. All-up you have $20,000 saved in various accounts, including:
- the offset account against your loan
- a number of saving accounts
- a simple transaction account.
This amount is your Net Cash Figure.
For the next month, life goes on as normal. You (and possibly your partner) will earn a wage, and you may also earn money from your investments. You pay the bills—food, utilities, insurance, the mortgage, and so on.
And then, at the end of the month, take another look at your accounts and compare it to your Net Cash Figure at the start of the month.
Red or black?
If the amount you have now is higher than your Net Cash Figure at the start of the month, congratulations: you’re spending less than you earn, and you’re in the black. But if it’s lower, then you’ve spent more than you earned, and are now in the red.
Now, repeat the process for a few months (making each month-end amount your Net Cash Figure for the next month), and see if there’s a pattern.
Are your personal finances in the black most of the time? Fantastic! You should start looking at how to use this ‘surplus’ to create additional wealth by investing, paying more off your mortgage, etc.
But if your finances always seem to be in the red, then you need to take action. And quickly.
How we can help with your personal finance
At Equus Partners we have some fantastic strategies and tools that can help you:
- understand your Net Cash Figure
- get your personal finances back in the black
- use your personal cash flow profit to create financial freedom for you and your family.
To find out more, get in touch with us today.
Because when it comes to your finances, black looks so much better than red.