The Many Benefits of Leasing Restaurant Equipment
Leasing restaurant equipment is a great way to preserve cash flow, build capital, and grow your business. Here are the many benefits of leasing such equipment.
The costs of running a business are immense. The costs of running a restaurant, however, are often even greater than the average business. Restaurants must worry about significant labor costs, spoilage, food waste disposal, certification, inspections, high-quality ingredients, expensive décor, a top-notch location, and industrial-grade kitchen equipment – each item often costing thousands, to tens of thousands of dollars.
Among these costs, payroll, rent, and equipment often make up the majority of a restaurant’s expenses. Rent and payroll are relatively inflexible – but equipment costs can be massively slashed upfront by opting to finance your equipment rather than buy it with capital, especially if you’re strapped for cash to begin with, as many small-scale restauranteurs are.
Preserve your cash flow, build valuable capital, and save yourself the option of opting for a bank loan by financing your equipment through a vendor or financial institution, either with restaurant equipment financing, or by getting an equipment loan.
Why Lease Restaurant Equipment?
The main difference between equipment financing options such as leasing restaurant equipment, or getting a loan for your fryer, and a traditional cash loan, is that the collateral of the equipment (and working with a financier with direct ties to vendors) often lands you much better conditions and lower interest.
Equipment leasing is particularly superior for smaller restaurants or restaurants in the middle of an expansion, by significantly cutting upfront costs, and allowing you to save money on certain equipment. Depending on the conditions of the lease, you won’t have to sacrifice valuable revenue to source repair costs outside of basic maintenance, and you have an incentive to upgrade your equipment.
There are also certain tax advantages to leasing restaurant equipment. While you lose the benefit of writing off the depreciation of an asset you do not own, you may be able to deduct lease payments as expenses. Section 179 of the US Internal Revenue Code allows you to make an immediate expense deduction (up to a limit of $1,050,000 in 2021) for depreciable equipment purchased within your first year. It is a source of substantial tax relief to startup businesses.
Leasing Equipment Saves Money
The long and short of it is that leasing equipment spares cash for other important endeavors that might not be as easily financed.
You might get a great lease on a commercial dishwasher, but are guaranteed to have a harder time getting the same kind of installment payment option on upfront renovation costs for your new restaurant, or on the material costs going into furnishing and setting up your very own floor space and kitchen. Money saved upfront by opting to lease rather than buy can go toward payroll, marketing, or food orders.
And because you aren’t opting for a loan – which often starts with a significant down payment on each equipment, from 10 to 20 percent – all you have to worry about is making your monthly payments.
Leasing Restaurant Equipment is Ideal for New Locations
Whether you’re a startup restaurant or branching out into a new location, leasing restaurant equipment will allow you dodge the significant down payment to be expected on every equipment loan you take, from 10 to 20 percent. All you would have to worry about is making your monthly payments.
This leaves you with a steadier cash flow to keep your restaurant afloat as you cover costs and earn enough to break even.
Leasing Means Upgrading
Another benefit of leasing over buying or financing an equipment purchase is that a lease can be renewed with new equipment, rather than being saddled with equipment you might not need or want to make use of anymore. This is especially useful for restaurant equipment with a relatively high turnover and low life cycles.
Some Leases Are Better Than Others
Some equipment can better utilize the perks of leasing than other equipment. Equipment that generally has a short life cycle (a few years) may make more sense financially to lease, rather than financing and selling or scrapping the equipment at the end of its life cycle. Examples include coolers and refrigerators, certain coffee machines, or ice machines.
On the other hand, an expensive espresso machine, commercial stove, kitchen ventilation system, or commercial oven should be purchased and owned, as these can last much longer.
Leveraging Lease Options for Restaurant Equipment
Some leases are structured to become purchases at the end of their term. This means you can get a lease that effectively covers the entirety of the equipment’s value with the option to buy it for a nominal fee (such as $1), or a lease that gives you the option of paying the remainder of the equipment’s value in a lump sum for ownership rights.
While this removes some of the benefits of taking on a lease to being with – especially the ability to easily upgrade equipment – it is still an option to consider when leasing equipment you plan to own and maintain for a decade or two, and provides your business with additional flexibility in the matter.
Getting a Lease for Restaurant Equipment
The conditions and costs of a restaurant equipment lease will depend on the financial viability of your business, as well as your restaurant’s credit history.
A financier or vendor will want a breakdown of your cash flow, and proof that your revenue can keep up with the demands of the lease, as well as your other costs. The better your credit is, the better the terms of your lease.
Is Leasing Restaurant Equipment a Good Idea for You?
At the end of the day, the choice of leasing restaurant equipment depends more on what equipment to lease, and what equipment to finance otherwise.
Even if you’re starting with a substantial financial backing, it often makes more sense in the long-term to offset some of the upfront costs of outfitting a restaurant by opting for equipment leases, whether to save money or to take advantage of the other benefits of leasing, such as ease of upgrade.
Be sure to have a conversation with your accountant or financial planner on the feasibility of financing new equipment, and which financing option to consider.