Restaurant Equipment Leasing: The Ultimate Guide

Leasing restaurant equipment allows businesses to gain access to necessary tools to run a restaurant without buying, often with lower payments than a loan. Leasing also allows for frequent upgrades while offering many of the same benefits of ownership. Leased restaurant equipment may require as little as 0% down and repayment between 12 – 72 months.

For approval in under an hour and funding for a restaurant equipment lease available as soon as the same day, borrowers can apply with US Business Funding on several types of equipment leases with flexible repayment terms starting at $10,000.

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Restaurant Equipment Leasing Providers

Restaurant equipment leasing is available from several types of financing companies, ranging from traditional lenders like banks to alternative lenders. Restaurant equipment may also be leased directly from the manufacturer or dealer, which is commonly known as in-house financing. We’ve researched lenders and identified providers that offer restaurant equipment leasing.

Restaurant Equipment Leasing Providers

Some restaurant equipment leasing providers are:

1. US Business Funding

US Business Funding is a business loan broker that offers borrowers access to a large marketplace of lenders that specialize in restaurant equipment leasing. With leases starting at $10,000 and no stated maximum, US Business Funding offers flexible equipment leasing options with terms lengths between two and seven years.

US Business Funding will work with borrowers with credit scores starting as low as 500 so long as the business generates at least $250,000 in annual revenue and can show two years in business. Borrowers that can meet minimum funding guidelines and are considering leasing used equipment, or that cannot qualify for a special manufacturer’s lease option, should consider US Business Funding.

2. Balboa Capital

Balboa Capital offers equipment leasing with no minimum dollar amount and application only leases up to $250,000 on new and used equipment. Additionally, Balboa can provide funding in the form of term loans and merchant cash advances (MCAs), making it a flexible financing partner.

Balboa will work with newer businesses with at least one year in operations and requires a minimum credit score of 600 for equipment leasing. Restaurant owners interested in term loans can apply with a credit score of 560 or greater, and Balboa’s MCA program has no credit minimums.

3. National Business Capital & Services

With a large network of over 75 lenders in its marketplace, National Business Capital & Services boasts a variety of flexible restaurant equipment leasing options. Restaurant owners can expect interest rates between 8% and 20% on leases ranging from one to five years.

Well-qualified borrowers can access startup restaurant equipment financing with National provided they have at least a 650 credit score. Otherwise, borrowers with a 550 or better score and at least $120,000 in gross annual sales should consider National for the variety of programs available, as well as the depth of its lender network which should give restaurant owners a good chance at the best rates and terms.

4. Smarter Finance USA

Smarter Finance USA offers leases on restaurant equipment up to $250,000 as well as the option of term loans. With term lengths ranging from one to seven years, and some flexible repayment options from a variety of lending partners, Smarter Finance USA is an option for restaurant owners who want to shop for the best terms.

Smarter Finance casts a wider net with its equipment leasing program, offering financing to both new businesses as well as borrowers with bad credit, with scores starting as low as 550. This flexibility, as well as access to a range of lease term lengths and repayment options make Smarter Finance USA a smart choice for restaurant owners.

How Restaurant Equipment Leasing Works

Leasing restaurant equipment allows a business to gain access to needed equipment without purchasing it. Restaurant equipment leases generally range between one and five years, and payments are made monthly for the duration of the contract. Restaurant owners can pay a lease off early; however, that won’t always save money, as the entire sum of the lease payments is still typically due. Some lenders offer early payoff discounts, but this is uncommon.

Unlike a loan, ownership of leased restaurant equipment doesn’t automatically transfer to the lessee when the lease ends. There are many different types of leases, some of which allow lessees to purchase equipment at a bargain purchase price at the end, while others do not. Whether this is an option and how much the lessee is required to pay to purchase the equipment varies by the type of lease.

When to Lease Restaurant Equipment

While some businesses will choose to purchase equipment instead of leasing it, there are several scenarios where leasing equipment makes more sense from an economic standpoint, especially with some equipment leases offering the benefits of ownership combined with the flexibility of leasing.

Businesses choose to lease restaurant equipment because it allows them to:

• Get approved with lower qualifications: Equipment leasing typically has a lower barrier to entry for new businesses and borrowers with poor credit, making it a great way to finance restaurant equipment with bad credit.
• Frequently upgrade equipment: Shorter-term equipment leases allow for upgrading equipment as often as once a year.
• Keep monthly payments lower: Many leases allow for smaller payments either because you’re not paying the full balance on the equipment or because the lease has an optional balloon payment at the end.
• Take advantage of manufacturer incentives: In many cases, manufacturers and dealers will offer same-as-cash lease terms and special discounts.
• Lower initial expense: Compared to purchasing outright, leasing restaurant equipment allows for small upfront costs, with zero down financing available and down payments of 10% – 20% being common.
• More flexible terms: Leases have much more flexible repayment options compared to loans, with seasonal, deferred, and step-up payments (where the payment grows over time) commonly available.

Practically every business requires some sort of equipment, with the total investment in equipment thought to exceed $1.8 trillion in the US by 2020, according to the Equipment Leasing & Finance Foundation. Of that investment, 68% is thought to be financed, and equipment leases lead as the most popular financing type at 39%.

While minimizing debt is always a good practice, in the case of mission-critical equipment, it pays to do due diligence to ensure the business is able to continue to grow. Leveraging an equipment lease as a tool for outfitting a kitchen allows a business to increase the size and quality of the menu and the number of patrons served simultaneously while cutting down on maintenance costs for out of date and aging equipment.

Ways to Lease Restaurant Equipment

Equipment leases come in many different configurations and offer much more variety and flexibility than comparable equipment loans. The type of equipment lease that a business chooses should be based on the type of equipment being financed, its expected economic life, how long it is needed, and whether the business intends to keep the equipment at the end of the lease.

Capital Lease vs Operating Lease

There are two overarching categories that a restaurant equipment lease may be classified as capital leases and operating leases. These categories define the tax treatment a lease will receive. As a general rule, all leases with a bargain purchase option in the contract are capital leases, and leases that don’t require payment of a significant percentage of the equipment’s value during the lease term are operating leases.

Capital Lease Tax Treatment

Capital leases receive similar tax treatment to equipment loans and closely resemble ownership. Restaurant equipment financed with a capital lease may be depreciated according to the IRS’s depreciation schedule under Section 179, including accelerated depreciation up to the full value of the equipment in the first year (or $1 million, whichever is less). Payments made to cover interest may also be written off as an interest expense, while principal payments may not.

Operating Lease Tax Treatment

Restaurant equipment financed with an operating lease is not entitled to depreciation and, from the IRS’s point of view, is not considered property of the lessee. Instead, the business is paying rent on the equipment in return for the right to use the equipment for a specific period of time. Contrary to capital leases, the entire payment made on an operating lease may be deducted as an operating expense, similar to a short-term rental expense.

Types of Restaurant Equipment Leases

The following are common restaurant equipment lease types:

$1 Buyout Lease

A $1 buyout lease most closely resembles an equipment loan and is a type of lease that is commonly offered by equipment manufacturers or dealerships as an incentive. It is best used when a business intends to keep the equipment at the end of the lease term and is characterized by a symbolic $1 buyout option at the end of the lease.

Restaurants that don’t intend to keep the equipment long term or that need equipment that quickly becomes obsolete should consider alternatives to a $1 buyout lease. Although flexible repayment terms are available, this lease is generally the least flexible overall as the business is paying over 99% of the cost of the equipment over the length of the term, meaning that it is fully invested in the equipment should it fail or become obsolete.

10% Option Lease

A 10% option lease is another type of capital lease, where instead of paying $1 at the end of the lease to buy the asset, the borrower has the option to pay 10% of its value, which is determined when the lease is signed. This option offers lower monthly lease payments than a $1 buyout lease, in exchange for the balloon payment option at the end, which is optional.

Businesses that intend to own the equipment but would like lower monthly payments should consider this option. However, borrowers should be wary of a variation of this lease, known as a purchase upon termination (PUT) lease, where the balloon payment is not optional. Restaurants that need to frequently upgrade equipment may still find this option is not the ideal fit, as 90% of the equipment’s value is paid by lease-end.

Fair Market Value Lease

A fair market value (FMV) lease is a popular lease option that typically falls into the operating lease category. With an FMV lease, only a fraction of the equipment’s total value will be paid off, which means that monthly payments can be much lower and term lengths shorter, which favors more frequent upgrades. At the end of the term, the lessee can either walk away from the equipment or purchase it at fair market value.

FMV leases are a great fit for restaurants that need to frequently upgrade equipment, or for shorter-term needs. It may also be preferred for POS and software needs, as it allows for greater flexibility compared to purchasing. Businesses that purchase equipment at the end of the lease will likely pay a much higher cost with an FMV lease than a comparable buyout lease or loan.

Restaurant Equipment Leasing Costs

The single biggest factor influencing restaurant equipment leasing costs is borrower credit, followed by the age and condition of the equipment. Interest rates charged by equipment leasing providers range between 5% – 20% on good to average credit. Many lenders charge administrative or lease origination fees, which impact APRs when financed. Businesses should be prepared to pay between 10% – 20% upfront on equipment leases, although zero-down leases are available.

Restaurant equipment leasing rates and fees include:

• Interest rate (5% – 20%): Borrowers with excellent credit may see lease interest rates as low as 5%, with 0% financing available on new equipment from certain manufacturers.
• Administrative fee ($200 – $300): Many equipment leasing providers charge an administrative fee. These may be charged in addition to any origination fees, and application fees.
• Lease origination fee (1% – 3% of lease amount): Some lenders may charge an origination fee, which can usually be financed into the lease payment.
• Down payment (up to 20%): Well qualified borrowers (with a credit score above 680) with solid earnings may be able to lease equipment with no money down; however, most businesses will want to plan for between 10% and 20%.

Restaurant Equipment Leasing Terms

Terms on leased restaurant equipment will vary depending on the type of lease as well as the borrower’s credit worthiness and the equipment’s remaining economic life. For example, equipment with a longer remaining life will be eligible for longer terms. The type of purchase option negotiated—if any—will depend on creditworthiness as well.

Some restaurant equipment leasing terms include:

• Length of lease term (typically two to five years): Most leases will range between two and five years; however, leases may be available for as little as six months, and as many as seven years.
• Repayment frequency: In addition to monthly payments, more flexible options may be available, including deferred payments, as well as seasonal, and step-up payments.
• Purchase option: Many leases define a bargain purchase option, or buyout amount, which is usually either $1 or 10%, payable at the end of the lease in order to own the equipment. Otherwise, the equipment may be purchased at fair market value.

Restaurant Equipment Leasing Qualifications

A business’s qualifications, and in many cases those of any partners signing on behalf of the business, will drive the conversation around terms and costs, impacting everything from the interest rate to the amount of time equipment may be financed for. Most lenders will want to see good borrower credit (at least 660) and stable revenues. Many lenders also require a year or more in business and $100,000 or higher gross annual revenue.

Some of the minimum qualifications for leasing restaurant equipment are:

• Credit score (660+): To get the best terms, borrowers should have good credit (660 or better); however, leases are available to owners with bad credit, usually requiring a higher down payment and higher interest or finance charges.
• Time in business (one to two years): Most lenders want to see at least one or two years in business, while some banks may ask for three or more. Some alternative lenders will work with businesses with six months or fewer in business.
• Annual revenue ($100,000+): In most cases, restaurants will need to be able to show revenue. Some alternative lenders will work with startups, in which case they will rely on projections of future revenue, and others have no minimums at all.

While some lenders have strict criteria that must be met, and want minimums met across the board in order to qualify, some lenders make credit decisions based on more complex scenarios. For example, some lenders may be willing to work with a business with no history and no revenue, provided the borrower has very strong credit and can show revenue models that cover the cost of the equipment.

5 Restaurant Equipment Leasing Mistakes to Avoid

Five restaurant equipment leasing mistakes to avoid are:

Understand Early Payoff Terms

Many business owners agree to lease equipment without fully understanding the terms of the agreement, and are commonly surprised by the payoff amount when they attempt to payoff an equipment lease early. Equipment leases are an agreement, ultimately, to pay a specific amount of money over a period of time.

So, a borrower might agree to pay $150,000 over time to access equipment worth $100,000, with that total including all interest charges and other fees. That amount won’t change, whether it’s paid off in three months, or three years. Compare this to a loan, where borrowers can stand to save significant amounts in interest by paying off the loan early. This can lead to sticker shock for owners unaware of how leases work.

Lease the Right Equipment for the Space

While choosing the right restaurant equipment to lease might seem like it’s all about how functional it is, restaurant owners should make sure the equipment is also functional for the space. Failing to account for how a piece of equipment will fit a restaurant’s floor plan is planning for failure. Once the equipment has been leased and delivered, returning it can be costly, so a measuring tape and a patient approach are recommended tools.

Check for Liens on Used Equipment

If shopping for used equipment on the private market, restaurant owners should check with the seller to see if there are any UCC liens on the equipment, or blanket UCC liens on business assets. If there are, the lender will need to be contacted in order to release its interest in the equipment before it can be leased to a new restaurant.

Plan for Ongoing Maintenance

Many restaurant owners make the mistake of believing that ongoing maintenance costs will be covered by the financing company. This is often not the case, and failing to plan for upcoming equipment maintenance or to fix broken equipment may have devastating consequences. Restaurant owners should budget regular maintenance for all major pieces of equipment, and ensure there is an emergency fund or equipment breakdown coverage in case of equipment failure.

Train Staff on New Equipment

When placing new leased restaurant equipment into service, it is important that staff members receive training on the new equipment. In the case of some major pieces of restaurant equipment, it may be prudent to purchase special training from the manufacturer or dealer. In many cases, this training can be paid for by rolling the cost into the equipment lease agreement. Failing to train employees may lead to equipment malfunction or misuse, which can lead to costly repairs or injury.

Pros & Cons of Restaurant Equipment Leasing

Leasing restaurant equipment has several advantages for small businesses, including the ability to frequently update equipment as well as enjoy tax breaks. It also presents unique challenges, such as complex accounting and tax compliance and potentially higher costs for businesses that end up keeping the equipment.

Pros of Restaurant Equipment Leasing

Leasing restaurant equipment allows businesses to:

• Upgrade equipment frequently: Equipment that quickly becomes obsolete can be frequently updated to the newest model.
• Preserve cash flow: Up front payments are typically low (5% – 20% of total cost), especially compared to purchasing the equipment outright.
• Take advantage of tax breaks: Restaurant equipment that is covered by a capital lease agreement can be depreciated up to $1 million the year the equipment begins being used. Operating leases allow payments to be written off as an operating expense.
• Flexible repayment options: Compared to a loan, lease repayment terms can be very flexible, including deferred payments, where payments are not due until the equipment has been placed into service.

Cons of Restaurant Equipment Leasing

Some of the disadvantages of leasing restaurant equipment are:

• Higher cost: Although initial costs and monthly payments are likely lower than a comparable loan, for equipment that will ultimately be paid off and owned, a lease may have higher overall costs.
• Increased complexity: Expenses related to equipment leasing must be accounted for, including listing leased equipment as an asset, which creates additional administrative burden.
• Early cancellations: In many cases, paying off an equipment will not yield a discount, and may actually result in a cancellation penalty, meaning a business might be stuck paying for equipment it is not using and cannot sell.

Alternatives to Restaurant Equipment Leasing

For a variety of reasons, restaurants may choose to avoid leasing equipment. While the myth that restaurants fail higher rates than other small businesses has been largely debunked, leasing companies that will work with restaurant equipment are harder to find. Additionally, restaurant equipment is generally at lower risk of becoming obsolete, and is permanently installed on location, making an equipment loan a better option for many businesses.

Some alternatives to restaurant equipment leasing are:

Equipment Loan

For restaurant owners that plan to own the equipment long term, an equipment loan can make more sense than an equipment lease. An equipment loan allows a business to gain ownership of an asset by agreeing to pay for the equipment over a period of time, plus interest. Compared to equipment leases, equipment loans often have stricter credit and time-in-business requirements, and are more likely to be offered by traditional banks.

Equipment loans are amortized, which means a business can pay off a loan early and save on interest charges in most cases. This stands in contrast to an equipment lease, where the total payoff amount is based on an agreed upon number of payments over a period of time. So, for business owners who want to keep the equipment long term, and may wish to pay the equipment off early, equipment loans hold several advantages.

SBA 504 Loan

For businesses that plan to purchase many pieces of restaurant equipment at the same time and don’t mind a longer and more complicated approval and funding process, an SBA 504 equipment loan may be an attractive option. With interest rates below market, and term lengths as long as 15 years, an SBA 504 loan allows a restaurant to build out and update its kitchen while keeping monthly costs low.

Well qualified restaurants with at least a 680 credit score and two years in business would be best positioned to take advantage of SBA financing. Additionally, businesses must show that they are supporting a public policy goal, or that the funding will create or retain one job for every $65,000 in funding. Additionally, average funding times range from 45 – 90 days, so this is not a good option for businesses in need of quick access to equipment.

Term Loan

A term loan allows for access to capital that isn’t necessarily earmarked for a specific use, and as such term loans can be used for equipment financing, working capital, and tenant improvements. Typically ranging between two and five years, term loans are not collateralized by a specific asset and usually have higher interest rates, which range from 9% to 20% or more, depending on credit, revenue, and time in business.

Businesses that need quick access to equipment financing with the benefit of additional working capital for other needs may wish to consider a term loan. Restaurants that are hoping to purchase a piece of equipment that doesn’t meet lender guidelines may also wish to consider this option.

Line of Credit

A business line of credit (LOC) is a revolving line that allows businesses to access capital for short- and long-term funding as often as needed over a period of time known as the draw period. Similar to a credit card, interest is only paid on the amount of the line that is drawn, and paying down the line grants businesses access to that capital for future needs.

Minimum required payments for LOCs are often interest-only, meaning lower payments which can be beneficial for businesses with seasonal cash flow issues. Many restaurants and other service-based businesses use a line of credit to meet payroll requirements caused by temporary lulls in business. Borrowers should typically have at least a 600 credit score and one year in business with $100,000 in revenue in order to qualify.

Merchant Cash Advance

A merchant cash advance (MCA) allows a business to access funds in exchange for a percentage of daily credit card receipts, up until the advance has been paid off, plus finance charges. MCAs are often compared to payday loans, and the cost of capital can be high (with APRs ranging from 80% – 120%) making MCAs an option typically reserved by businesses as a last resort.

Businesses that need a quick, temporary financing solution to replace or repair restaurant equipment may wish to consider working with an MCA provider, after exhausting other funding options such as a short-term loan or business line of credit. For restaurant owners that do choose an MCA, it is important to pick a provider with clear and transparent terms, and reasonable finance charges.

Business Credit Card

Business credit cards are a popular financing option for business owners, and are one of the easiest forms of credit for businesses to access. Similar to a line of credit, a business credit card allows business owners to make purchases quickly and cover unexpected expenses, with the added benefit of earning rewards and other perks. Additionally, many business credit cards come with attractive introductory offers such as 0% APR for one year.

Business owners who need quick access to funding to replace or repair a piece of restaurant equipment should consider a business credit card. For businesses that can quickly pay off the balance, this may be the least expensive solution, particularly for businesses taking advantage of an introductory APR. There are many options to choose from, so restaurant owners will want to do their research when choosing the best business credit card.

Leasing Equipment vs Buying Equipment

For most businesses, deciding whether to lease restaurant equipment or buy, it will come down to a few key considerations. Primary among these is whether or not the business can afford to purchase the equipment outright. For those that cannot, an equipment lease may seem like the best option.

Businesses that can afford to purchase the equipment outright may still wish to consider leasing for the access to flexible repayment terms as well as the ability to frequently upgrade equipment. Conversely, for equipment with a long economic life that a business intends to keep, advantages of buying include saving money on interest as well as greater flexibility in choosing equipment insurance, storage, and maintenance.

Restaurant Equipment Leasing Frequently Asked Questions (FAQs)

This article has touched on many of the key points restaurants should consider when leasing equipment. Here are some of the most frequently asked questions about leasing restaurant equipment that we may not have covered.

Some of the most commonly asked questions are:

Can I lease restaurant equipment with bad credit?

For owners with bad credit, leasing restaurant equipment may be a great option. Programs are available from some lenders for borrowers with a 550 credit score, and with flexible repayment options and fair market value leases, borrowers can keep monthly payments manageable.

What is an equipment financing agreement?

An equipment financing agreement (EFA) is a hybrid between an equipment lease and an equipment loan. Similar to an equipment lease, the asset transfers to the borrower at the end. EFAs generally dictate that all interest be paid in addition to the principal, unlike most loans where money can be saved with early payoff.

What type of restaurant equipment should be leased?

Big ticket items with a long shelf life shouldn’t be leased unless the business can save money by doing so. Leasing items short shelf life or high failure rates can benefit a restaurant. As an additional bonus, these items are often backed by a replace-or-repair clause in the contract in the event of failure.

Can I depreciate leased restaurant equipment?

If the equipment is covered by a capital lease contract, then it can be depreciated according to IRS guidelines. If the lease contract is a fair market value (FMV) lease agreement, then the equipment cannot be depreciated, however any lease payments may be deducted as an operating expense.

Bottom Line

Businesses that are interested in leasing restaurant equipment will want to consider several factors, including the type of equipment needed, its useful economic life, as well as how long the equipment will be needed, when choosing which lease to use. Additionally, business owners will typically need to factor in their personal credit score as well as the amount of time in business and the business’s annual revenue.

Borrowers can apply for an equipment lease starting at $10,000 and receive approval and funding as soon as the same day with US Business Funding on a variety of leases including $1 buyout and fair market value.

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