Owning and running a restaurant is expensive, and according to an industry survey, startup costs can run anywhere from $125,000 to $735,000 depending on whether land purchases or construction is necessary.
Whether your restaurant will be big or small, purchasing its equipment will consume a significant part of your initial startup budget. And even after you are established, a sizable portion of your operating budget will be devoted to servicing, upgrading and purchasing new equipment as needed.
Leasing equipment can be a budget-friendly alternative if you need to put your money toward other items, such as your first big food order or employee wages, or if you don't have a great deal of credit. The key is to do your research, shop around, and make sure that you are choosing the financing company and leasing options that suit you now—and down the road.
Types of equipment to lease
High-cost items with short lifespans are ideal for leasing. Because they receive a lot of action, they wear out easily and need replacing regularly. Such items include:
- Ice machines (Estimated retail value: $1,500-2,700)
- Refrigerators ($3K+)
- Reach-in Freezers ($3K+)
- Coolers ($1K-5K+)
- Commercial dishwashers ($3,500+)
- Refrigerated worktables ($2K-6K)
- Water purification units ($1K-5K)
- Coffee machines ($500-1K)
- Fryers ($500-6K+)
- Broilers ($1K-10K+)
Pros and cons of leasing
PRO: You spend less money initially when you start your restaurant, and you can work with your financing company on a monthly payment that suits your budget. Many companies specialize specifically in leasing restaurant equipment. An online search for restaurant equipment leasing companies will yield dozens of options. Just be sure to do your homework and read the fine print.
CON: You could get locked into an equipment lease agreement that is hard to get out of. Also, with interest and other fees, you could end up paying a whole lot more for leased equipment than if you bought it brand new. Compare what you will pay over time for leased equipment versus purchased equipment. It may be more prudent for you to obtain a small business loan or other financing to purchase the equipment instead of leasing it. You can always consider purchasing used equipment as well, with the understanding that it is older and may not have the warranties newer equipment has.
PRO: You won't need as much credit or have to use your working capital to replace worn-out or broken equipment, freeing it up for other expenditures.
CON: Even if you don't need that much available credit, the financing company will still check your existing credit. Based on that check, you could be denied the lease or end up paying a high interest rate. In addition, depending on your leasing arrangement, you could end up owing a substantial lump sum at the end of your lease when the equipment is old and could need replacing. Again, shopping around to find the best lease terms is critical.
PRO: When your lease is up, you can return the equipment and upgrade to a newer model, keeping your kitchen always stocked with new, top-of-the-line equipment.
CON: You never fully own the equipment, and you won't be able to list that equipment as an asset should you need a loan from the bank. It's also important to take into account the term of your lease. A five-year term for equipment that typically needs to be replaced in three years is probably not the best idea, since it will be pretty worn out by the time your lease is up.
PRO: Some leasing companies offer great services, such as delivering the equipment, setting it up properly, cleaning it and servicing it.
CONS: Those companies could apply hefty monthly fees in order to provide those services. In addition, similar services may be provided under your warranty if you purchase new equipment, and those aren't fees that you would have to cover. Or you might find that the cost of paying a technician or other certified handyman to service the equipment is actually cheaper.
PRO: You may be eligible for tax deductions. Under a typical lease agreement, you can deduct the lease payments on qualifying restaurant equipment on your business tax return.
CON: The IRS could deny the deduction and make your life difficult for a short while.
Bottom line: Leasing is a great option for some restaurant owners, but not everyone. We can't stress this enough: Do your homework, shop around and figure out what the best option is for you.