From the grandest fine dining restaurant to the local coffee shop, a lot of work goes on in the back of the house to produce what ends up on a customer’s plate. It takes a lot of equipment to operate a full-service restaurant, and even modest eating establishments require capital to meet their restaurant equipment financing needs.
The list of startup equipment for new restaurants begins with the basic necessities for producing delicious meals—commercial ovens and ranges, freezers and refrigerators (both walk-in and reach-in), and food prep tables to begin with.
On top of those basics, there’s a long list of other equipment and fixtures that may be needed, including commercial sinks and shelving, transportation racks, microwave ovens, grills, deep fryers, ice makers, steam tables, and the like. If the restaurant will include a bar area, that requires additional equipment.
Then there are the smallwares—items costing $500 or less. These include small appliances like blenders and mixers, as well as cookware and the utensils and tools used in food preparation, storage supplies, and the glassware, flatware, and dinnerware used by customers. The total equipment cost can be staggering.
A recent survey of independent restaurant owners showed the median cost of kitchen and bar equipment for a new restaurant to be $75,000, with an average cost of $115,655, which makes restaurant equipment financing particularly challenging.
Of course, that encompasses a range of different restaurant types and sizes, so the equipment cost for your new restaurant could be considerably more or less. Your specific equipment needs will depend on a number of factors, such as the square footage of the kitchen and the volume you anticipate.
Just be sure that you select equipment capable of handling the volume of meals you expect to turn out. You can’t afford to keep customers waiting because you have only one small fryer, and nearly every menu choice comes with French fries.You may be able to bring down your total equipment cost by purchasing used equipment when feasible.
Big-ticket commercial ovens and refrigerators are a lot like new cars; they depreciate the minute they leave the dealer’s premises. A gently used top-of-the-line commercial range can cost you significantly less than a brand new one and should hold up just as well, providing that you buy from a reputable source.
Restaurant Equipment Financing Options
Traditional Term Loans
Aspiring restaurateurs face some significant challenges in obtaining capital to cover startup costs. Traditional lenders are often reluctant to lend to restaurant owners because of a common misconception about the first-year failure rate of new restaurants.
An old, flawed study came up with a 90% early failure rate, which was enough to bias loan officers against lending to start-up restaurants. That study has since been debunked, and recent research shows that new restaurants are no more likely to fail than new landscaping, real estate, or automotive repair businesses, but that doesn’t seem to have made banks more receptive to lending to startups.
Fortunately, it’s usually easier to obtain funds to purchase equipment than to cover other restaurant startup costs because the equipment itself serves as collateral. That can make a big difference in obtaining restaurant equipment financing.
The most expensive pieces of commercial kitchen equipment typically have a useful life of seven to ten years, which makes mid- or long-term restaurant equipment financing appropriate.
With the equipment as collateral, some banks and financing companies will make equipment loans to restaurant owners with only six months in business, compared to the usual one year required for other term loans.
While that can make it easier to get an equipment loan for a renovation or when opening a second or third restaurant, it still leaves first-time restaurant owners struggling to find restaurant equipment financing for a start-up.
And even with collateral, equipment loans can entail an uncomfortably high annual APR—the annual percentage rate charged by the lender, which represents the yearly cost of funds over the life of a loan.
Equipment leasing can be another way to reduce the cost of equipping a restaurant kitchen, though leasing companies often require applicants to have a good credit history and to have been in business for a certain minimum time.
The online calculators leasing sites typically provide don’t take all situation-specific factors into account, so the actual rates you would be charged could be significantly higher than shown by a calculator. Leasing companies generally won’t give you “real” numbers until you’ve filled out a credit application.
The finance charge rate for leasing equipment under $100,000 is typically higher than it is for equipment over $100,000.There are two types of equipment leases. A finance lease enables the lessee to buy the equipment when the lease period is up, which is usually the same as the equipment’s expected useful life.
A true lease may be for a shorter period than the equipment’s normal life span. When the lease period is up, the lessee can either return the ease equipment or negotiate a price for its purchase. True leases are the less expensive of these two options.
One advantage of equipment leasing is that it relieves you of the responsibility of paying for equipment repairs. It also makes it easy to upgrade your restaurant equipment at the end of the lease. Equipment leasing is particularly appropriate for less expensive equipment with a shorter life expectancy, such as ice machines, coffee makers, and floor mats.
Leasing is generally a more expensive restaurant equipment financing solution than bank equipment loans. However, equipment leasing requires no down payment or equity, and startups are more likely to be approved.
Just as car dealers may offer their own point-of-sale vehicle financing as a way to encourage a purchase, so do many restaurant equipment suppliers. Offering their own restaurant equipment financing gives the supplier not only a sales tool but also a profit center.
Supplier financing has several advantages for restaurant owners compared to other options. Supplier financing is typically faster and easier to obtain than a bank loan. It may require no more than a simple credit bureau check rather than the extensive documentation required by traditional lenders.
Suppliers often build the cost of extended warranty protection into their financing, which is an attractive feature for many restaurant owners.
On the other hand, the rates and fees associated with supplier financing are usually higher than for other types of loans. Also, supplier financing is often only available for new equipment and only for the brands sold by that particular supplier, which rules out saving money by purchasing pre-owned equipment or lower-priced equipment from another supplier.
If you like the idea of supplier financing, pay close attention to the financing agreement or contract. There may be extra fees the supplier fails to mention during negotiations. Things like late charges and pre-payment penalties can make supplier financing a more expensive proposition than anticipated.
Merchant Cash Advances (aka Factoring)
Restaurateurs who cannot qualify for another form of restaurant equipment financing often turn to a merchant cash advance arrangement, also known as “factoring,” or “accounts receivable financing,” or “daily payment loans.”
Briefly, the finance company (factor) advances the restaurant owner a sum of cash against future debit card and credit card sales. The amount of that advance is based on a percentage (typically 40-90%) of the restaurant’s average monthly card sales, for which the factor gets a percentage (usually 2-5%) of daily card sales plus a monthly service fee.
A merchant cash advance is not a loan, so the owner’s personal credit is not a major qualifying factor, and it doesn’t add to the business’s debt burden. Sometimes this is the only form of restaurant equipment financing that a restaurant owner can qualify for.
Consequently, this is a very expensive way to come up with the capital to purchase equipment. When all of the fees and charges are taken into account, the actual APR (annual percentage rate) can be 50% or more.
For many restaurant owners, peer-to-peer lending provides a reasonable restaurant equipment financing option, primarily because it can be quicker and easier to obtain a peer-to-peer (P2P) loan than it is to obtain funding from other sources.
PTP loans are arranged through a lending platform that matches up business owners who need capital with investors looking for a better return on their money than they can get from other investment vehicles. Funding a loan of $50,000 or more would typically involve obtaining smaller sums from a number of investors.
The P2P lending industry combines features of crowdfunding and traditional lending, but what really distinguishes P2P loans from other methods of restaurant equipment financing is the way applicants are qualified and approved.
P2P lending platforms establish a connection with an applicant’s online records, both sales and banking, and social media accounts to help assess the applicant’s income potential and creditworthiness, rather than relying on the owner’s personal credit history. Consequently, this may not be the best financing route for startups with no significant online activity or presence on the Internet.
Restaurant owners who are approved will usually receive their funds in one or two business days, compared to the weeks or months it can take to obtain a traditional bank or Small Business Administration (SBA) loan.
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