You may never have thought of leasing restaurant equipment before, but it’s an excellent option for many business owners.
According to CNBC, 60% of restaurants fail in their first year, and if you have invested a lot of money into equipment for that dream, you could be in a bind if you don’t see the kind of foot traffic you are expecting.
But if you bought your equipment, then you would be able to sell it to someone else and recover some of your investment. That is unless someone was lending you the money. And those are just a few of many facets of the debate. Read on to learn more and discover which is the right option for your business.
Pros of Leasing Restaurant Equipment
Leasing restaurant equipment is a great way to outfit your kitchen quickly and get up and running. But that’s not the only benefit, check out these reasons.
Quick Access to Equipment with Little Capital
When you have the dream to start a restaurant, you will most likely want to open as quickly as possible so that you can start making an income.
But before you can get to that point, you will need to secure loans to finance the purchases for your new restaurant. One way to cut expenses at the beginning and make it a little bit easier to open is to start by leasing the equipment for your kitchen.
That way, instead of having to go through the process of getting financing or credit for the pieces you need, you can sign a contract, and everything will be delivered directly to your business’ door.
Potential for Tax Deductions
The IRS typically categorizes lease payments for equipment as a business operating expense. That means that it is tax deductible, unlike when you pay sales taxes on a large piece of equipment.
But if you do choose to buy, you can still save some money on your taxes by deducting for their depreciation over time.
Helpful for Pop-Up Restaurants and Temporary Kitchens
If you aren’t sure how your area will respond to a risky concept, then you may not want to overinvest in equipment for the restaurant kitchen yet. Leasing offers you the opportunity to get what you need without having to worry about what you will do with it if things don’t work out.
You Can Add on the Option to Buy
Many leasing contracts also offer the option to buy at the end of them. Try to shop around for a leasing policy with this option to avoid some of the pitfalls of leasing mentioned later in this article.
You Don’t Have to Worry About Paying for Major Repairs
Repairing restaurant equipment can wipe out a restauranteur’s savings. When you lease your equipment, if something significantly goes wrong you can simply ask the company you are renting from for a replacement. When you own the equipment, you will have to deal with repairs yourself unless you have a warranty.
You Can Upgrade When You’re Ready
Many lease agreements offer you the ability to update your equipment as new things become available. This helps you keep up with trends in cooking and allows you to try new things in the kitchen easily.
Cons of Leasing Restaurant Equipment
Leasing equipment isn’t all good. It can end up costing you a lot in the long run if you make the wrong choice.
You Have Nothing to Trade for Equity at the End of Your Lease
When you buy equipment, you invest your money into it, and when you are finished using it, you can sell it and get that money back. But if you lease, then all of the dollars you spend will never come back to you.
That is unless you choose a lease agreement with a clause giving you the option to buy.
Leasing Isn’t Always Available
There are many different types of kitchen equipment, and while many things are available from most kitchen appliance providers, there are still some things that they aren’t going to have. In those cases, buying becomes your only option.
You’re Responsible for Someone Else’s Equipment
When you lease equipment, you will be responsible for it until it returns to the company that you are renting from. That means that if one of your employee’s damages something, you may be liable for repairing it.
To be sure that nothing bad happens as the result of your lease, make sure you get in writing that you are not responsible for the condition of the equipment upon return or purchase an insurance policy that covers the equipment.
You Face Early Termination Fees If You Want to Switch Providers
If you are unhappy with your equipment and you bought it, then you can always sell it to someone else and get your equity back out of it. But when you lease equipment, not only do you walk away after making payments with nothing, but you also might be responsible for an early termination fee if you cancel your lease agreement early.
Although this isn’t a problem for most businesses in the first year, if your restaurant begins to go under and you need to get out without financially collapsing, then an early termination fee from a leasing company can wipe you out.
Pros of Buying Restaurant Equipment
Buying restaurant equipment can be much more comfortable than renting. It also allows you to choose what you want and customize your equipment.
It’s the Easiest Method
If you want to lease equipment, then you will have to fill out long contracts spelling out what the equipment will be used for, how long you will have it, and what will happen if you need to break your agreement. All of that negotiation takes a lot of time and energy.
Buying is much simpler since all you have to do is fill out an order form and put in your delivery address.
You Can Buy Exactly What You Want
While the equipment that is available from a leasing company may be of high quality, they won’t always offer exactly what you are looking for.
If you want to be able to upgrade and customize your equipment, then you should go ahead and buy it. Then you will be able to modify it as you like.
You May Get a Warranty on Your Equipment
Most of the restaurant equipment that companies sell new comes with a five to ten-year warranty. These warranties can save you if your equipment malfunctions.
But it’s nothing compared to the peace of mind that leasing gives you in being able to get new equipment at any time if it breaks down and that is part of your contract.
You Know Your Equipment Will Work
If you buy the equipment that you want specifically, then you know for sure it will work for your needs. But if you fill your kitchen with whatever is available, then you may not have enough space to cook everything that you want to.
Cons of Buying Restaurant Equipment
Buying restaurant equipment is a huge investment and can wipe out a large portion of your budget for start-up costs. There are other downsides to buying as well mentioned below.
You May Fall Victim to High-Interest Rates
If you don’t have all of the money to shell out for buying equipment up front, but you don’t consider leasing, then you may decide to take out a line of credit.
This would be an absolute mistake. Buying appliances on credit can lead to massive interest rate payments that you will be making on equipment that’s value is depreciating.
The Equipment Deteriorates over Time
When you buy equipment, it will inevitably begin to deteriorate over time. The only way to ensure you always have fairly new equipment is to be part of a continuing leasing program and rotate your equipment getting new pieces on a rolling basis.
New Equipment Will Come Out
Whatever appliances are out today are nothing compared to what kind of cooking devices they will come out with in the future. If you want to be up to date with the latest cooking methods, then leasing is always your best option.
How to Lease Restaurant Equipment
Leasing your equipment will be different if you are a startup or if you are already established as a restaurant business. If you are a startup, then you will not have established credit for your business already, and you may have to rely on your personal credit to get a loan.
While if you have been in business for a long time, then you will be able to take out along based on the business’ credit alone, assuming you’re in good standing.
Other considerations in the leasing process will include how successful they think your business is or will be and what your business plan looks like.
Considering Lease Terms and Lengths
Determining what kind of equipment you need is just one part of the decision when you decide to lease. You will also have to figure out how long you will need the equipment for. Do you plan on buying new equipment once your business is more established?
You should also make sure your contract mentions what happens if you end it early. Early termination fees can be frightening. You don’t want your business to go under and owe a bunch of money for the equipment that you can no longer use.
The personal credit of the person taking out the loan for a business is the primary factor considered in the decision. This is because they will be making decisions about the business’ payments.
If your credit is not good enough to get a loan on your own, then you can consider asking others to cosign for the loan with you. This can increase your odds but is not always enough to overcome personal credit. In that case, you may have to take some time to get your finances together before you take on the challenge of opening your restaurant.
Factors that contribute to your personal credit score include the number of inquiries into your credit history, your past bankruptcies, as well as how much other debt you have in your name. They compare the amount of that debt to the credit available to you and use that figure to determine the way you use credit.
Tips for Leasing Restaurant Equipment
When you choose to lease equipment, you need to make sure that you go to a supplier that will sell you a quality product.
You should also ask yourself what kind of warranties and replacements will be available for the models that you choose.
Shop Around for the Best Prices
Before you make any final decision on the equipment that you want, you should go to at least three stores to see what they have to offer. That way, you can compare the prices of various models and make an educated decision.
Don’t let a fast-talking salesman steer you into paying too much. Take the time to explore your options.
More Helpful Advice for Business Owners
Leasing restaurant equipment is a great way to get your restaurant started quickly. By not taking out a loan, you save yourself the interest and will always have more up to date equipment.
For more helpful advice as your restaurant grows, check out some other topics we have covered that can help you today.