Want to make a well-informed decision on whether to take up a restaurant equipment lease?
You have a growing restaurant, and you need additional equipment to support the growth. Everything seems fine now, but what if the economy turns sour and people stop turning up at your restaurant? What should you do to the new equipments?
You are probably asking yourself these questions, and that is why you are here for more information on restaurant equipment leasing.
In a nutshell, leasing is like renting. With a restaurant equipment lease, you get to use the equipment and in return, you pay a monthly fee to the leasing company over an agreed duration.
Continue reading. Once you finished this guide, you will be able to decide whether leasing is the right choice to finance your next equipment.
- 1 Benefits
- 2 Drawbacks
- 3 Things to Consider
- 4 Steps to Take
- 5 Alternatives
- 6 Are You Applying for a Restaurant Equipment Lease?
Signing up for equipment leasing yields a restaurant many advantages.
Retains Cash for a Longer Period
There is no need for a huge investment outlay with a lease.
You may have a limited cash reserve when your restaurant is new. Among the many areas to spend that small amount of money, buying a new equipment outright should be the last on your list.
Funding daily operations, marketing and hiring the right people are all better ways to use the money.
Reduces Risks During Economic Downturns
This benefit extends from the previous. You may not want to buy kitchen equipments outright even if you have a huge stash of cash in the bank.
You are required to pay the first and final monthly payment upfront when you sign up for an equipment lease. Even so, the first payment is still significantly lesser than what you need to pay if you are to buy the equipment outright.
Maintaining a large cash balance in your bank account instead of spending the money on kitchen equipments is advisable because the cash is going to power your restaurant through economic downturns or uncertainties.
Monthly lease payments stays fixed. The interests, together with payable fees, are all stated in the agreement.
Upon signing the lease agreement, you will know the expense to budget for every month. There is no need to worry about ad-hoc charges.
Some leasing companies offer to cover the charges for installation, training, software and shipping. If you take up the offer, you will be dividing the payment of these expenses over the lease period instead of a one-off payment.
Allows for Faster Growth
New restaurant equipments are often bought to support customer demand and growth. For some restaurants, especially the new ones, may not have so much cash to fund growth or collaterals to get a loan for the same purpose.
Other financing options such as bank overdraft and merchant cash advance are possible options, but they come at a very expensive rate.
You do not have to wait until you have enough money to purchase a new equipment. A lease allows you to get not only one, but multiple equipments right away.
Higher Approval Rate
Taking a restaurant equipment lease is always easier than trying to obtain a bank loan if you have a less-than-ideal credit score.
There are leasing companies out there that are willing to offer leasing arrangements for businesses with an imperfect credit score. However, you may be offered a higher interest rate or a shorter lease period when you have a low credit score.
No Repair and Maintenance Responsibility
With most leasing arrangements, it is the lessor’s responsibility to repair and maintain the equipment. Make sure it is stated so in your agreement.
This clause gives restaurant owners some form of insurance if they are uncertain about the equipment’s maintenance interval and how often it may break down.
On the contrary, if you are purchasing the equipment, you are ultimately responsible for any repairs and maintenance.
Leasing your next restaurant equipment may not be the best option because of the following disadvantages.
Not Every Equipment is Leasable
Depending on the leasing companies you approach, many kitchen equipments are available for lease including, but not limited to:
- Cooking equipments such as commercial microwaves, commercial deep fryers and commercial ranges.
- Flatware, catering equipment, and bar equipment.
- Refrigeration equipments such as commercial freezers and commercial ice machines.
- Dishwashing and janitorial equipments.
- Furnitures and furnishings.
You do not have the option to lease if the equipment that you are buying does not fall under a leasing company’s leasable equipments.
Here are some characteristics of equipment that are not available for lease:
- Fast depreciating value.
- Small or non-existent resale market.
- Vague ownership attribution.
When the equipment on your wish list is not available for lease, you will have to choose between funding the purchase with cash or to opt for other financing options.
Cannot Use Leased Equipment as Collateral
You do not have legal ownership over leased equipments. As a result, you cannot use them as collaterals for another loan.
You should not be surprised. Leasing companies has the right to repossess leased equipments if you are unable to make the monthly payments.
High Interest Rate
Businesses with a good credit score do not have to worry about this.
When you are shopping for the right leasing company, keep in mind that the advertised rates are for clients with a high credit score.
The interest rate and the amount of monthly payments are going to be steeper for businesses with an unimpressive credit score. They can even be more expensive than other financing options.
No Benefit for Early Settlement
The moment you put your signature on a lease agreement, following the payment schedule attached becomes your obligation.
Let us assume that you are trying to rent a commercial reach-in refrigerator, and the agreement requires you to pay $35 per month over 60 months. If you are paying it off before the end of the 60 months, you will still need to fork out the full amount of $2,100.
You are not going to get any discount or reward from the lessor. With this drawback in mind, many restaurant owners see their equipment lease contract out instead of paying it off earlier. They will get to spend the cash on other aspects of the business by doing so.
Things to Consider
Other than the benefits and drawbacks mentioned above, there are a few more things to consider before entering into an equipment lease agreement.
We looked at a sample list of leasable equipments earlier.
Which restaurant equipment are you trying to purchase? How many of them are you buying? Do you need to customize the equipment?
It may take longer to shop for a lease if the item on your wish list has a limited market appeal or very little resale value.
Try to negotiate if you cannot get a standard quote for certain equipments. Smaller and lesser-known leasing companies will want your business. Of course, the agreement offered may come with a higher interest rate or a shorter lease duration.
Length of Equipment Usage
When a piece of equipment has a long useful life, taking a bank loan could be more favorable than entering into a lease agreement. The latter requires a higher total cash outlay than the former.
Just like a rental agreement, both parties need to renew the lease contract if you intend to use the piece of leased equipment for a longer period. Such an arrangement requires you to continue making your monthly payments to the lessor.
On the other hand, a bank will transfer the ownership of an asset to your company once you paid the loan off. Thereafter, you are not expected to make any additional payment to the bank.
Some equipment financing companies may offer a discount on monthly rental payments if you wish to have extended usage of the leased equipment. This offer sweetens the deal, but most of the time, the cash outlay is still going to be higher than taking a bank loan.
Option to Purchase
While shopping for a restaurant equipment lease quote, you will see many financing companies highlighting the option to purchase the leased equipment at a specified price after a lease has expired.
If the equipment has a long useful life, and you need it even after the lease is over, this option is a plus point for you.
You can exercise the option to purchase by paying a pre-agreed sum between $1 to $100 to own the piece of leased equipment. Some leasing companies, however, charge 10% of the total lease payments instead, and the amount to pay can be excessive for large equipments.
Plans to Upgrade or Change Equipment
You are free to upgrade or change the piece of equipment that you are leasing at the end of the lease.
With an outright purchase or a purchase through a bank loan, you do not enjoy as much freedom because you will have to look for a buyer to dispose the old equipment off before looking for a new one.
Knowing how long it takes before the equipment demands an upgrade or change will help in your decision.
New vs. Old
Every business owner goes through this dilemma before buying an expensive piece of equipment. Should you buy a new one or is a secondhand equipment good enough to serve your needs?
A short remaining useful life of old kitchen equipments and their miniscule resale value keep lessors away. Thus, many restaurant owners opt to pay for them in full.
An old equipment may be cheaper than a new one, but you must not ignore the fact that they usually come without a warranty. Also, you might be paying more down the road for maintenance and repairs.
Just like a loan, although not as stringent, all lease applications go through a credit check. Leasing companies take this precautionary step because they want a capable lessee who can meet all the monthly obligations until the end of the lease.
Financing institutions in the United States almost always look at your Dun & Bradstreet Report, Credit Bureau Report (provided by credit rating agencies such as Experian, TransUnion, and Equifax) as well as the owners’ FICO Score.
A restaurant with a satisfactory credit rating will not only get their lease application approved, but the process will also be fast and painless.
On the contrary, if you do not have a good rating, you may need to go through a long application process, have your application turned down or being offered a lease with a high interest rate.
Steps to Take
Made up your mind to take up a lease for your next restaurant equipment purchase? Let us walk you through the steps to take, so your application gets approved in a breeze.
Step 1: Shop for Quotes
Kickstart your lease shopping by doing a search online, compile a handful of leasing companies, and submit your request for a quotation. Try to have at least three to four quotes before making any comparison.
Smaller equipment financing companies are usually more specialized than their larger counterparts, but the latter could be affiliates of major banks and financial institutions. Established leasing companies are also more stable as compared to the rest.
Ask for verifiable references before committing to any lease agreement. Do not rely on testimonials provided by the lessor.
In most countries, financing companies are required to follow strict regulations. Ask for relevant licenses or documents indicating the eligibility of an entity to offer leases. This step is crucial if you are dealing with small and relatively unknown financing companies.
Last but not least, hunt for bad reviews about the leasing companies that you have shortlisted online.
You can search for “[company name] scam”, “[company name] fraud”, [company name] review” or “[company name] sucks”. While browsing through the reviews, keep in mind that unlike frustrated clients, happy customers are less likely to share their good experience with a company.
Step 2: Compare Your Options
The interest rate, extent of financing, repayment period together with payable fees are critical elements of an equipment lease agreement. Compare every quote you received.
If you are in the United States, shopping for a good rate may have a negative implication on your credit score. Here is a quote found in this support article published by FICO:
For most people, one additional credit inquiry will take less than five points off their FICO score. However, inquiries can have a greater impact if you have few accounts or a short credit history.
On the bright side, the article mentioned that its system can identify a rate-shopping behavior based on the length of time which multiple inquiries took place. Do not want to see a dip in your credit score? FICO recommends doing your rate shopping within a short period, such as 14 days.
Step 3: Pay Attention to Fine Prints
Always read the fine prints before signing any documents related to a lease.
If you do have a lawyer, get him or her to go through the paperworks. If you are going through them yourself, always refer to the lessor’s representative if there are sections in the documents that you don’t understand.
The bottom line is, never get rushed into signing any legally-binding lease documents. Do not work with any representatives who are in a high-pressure selling mode.
Step 4: Prepare for Credit Checks
A credit check is compulsory for every lease application, especially if it is your first contact with a leasing company. They perform credit checks to lower the risk of default.
Leasing companies rely on data provided by credit rating or credit report agencies to carry out their evaluation.
In the United States, such evaluation involves referencing the Dun & Bradstreet Report and if the company does not have a diversified shareholding, the FICO scores of the individual owners.
Aside from credit rating reports, leasing companies also rely on your payment history for past leases if you have any. Some of them may even request for your latest financials if your credit report does not meet their approval requirements.
Do not worry if you are unfamiliar with all these. Good leasing companies spend time explaining their credit evaluation process to clients. They will share the indicators they look for in reports provided by credit rating agencies and how long the entire process will take.
There is an alternative way to lease new kitchen equipments without having to deal with leasing companies.
Negotiate a Leasing Deal with Suppliers
Does your restaurant have an established supplier which you are giving a lot of your business to?
Reach out to them and ask if they open to the idea of leasing a piece of equipment to you. They will have conditions. Some will want commitment to a minimum order quantity over a period while some will want an opportunity to promote themselves to your patrons.
Here are two examples:
A coffee bean supplier will lease a coffee machine to you if you agree to buy a certain quantity of coffee beans from them every month.
A beverage supplier may consider renting a commercial refrigerator to your fast food restaurant if you allow them to place a promotional banner in your restaurant.
This alternative saves you money that may otherwise be used to pay interest and other financing costs. The best part is, you can escape the cumbersome credit evaluation process.
Are You Applying for a Restaurant Equipment Lease?
Do you have a better understanding of restaurant equipment leasing now?
Are you buying, leasing or taking a loan for your new restaurant equipment? Share your decision with us in the comment section.
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