Starting or upgrading a restaurant comes with a significant investment in equipment. From ovens and refrigerators to mixers and dishwashers, the equipment required to run a successful restaurant can be costly. Restaurant equipment financing is a great way to alleviate some of the financial burdens, allowing you to acquire the necessary tools without having to pay for everything upfront. However, navigating the world of financing can be tricky if you don’t know what to look for.

Here are two essential tips for financing restaurant equipment that every restaurateur should know:

1. Understand the Types of Equipment Financing Available

When you decide to finance your restaurant equipment, it’s important to understand the different types of financing options available to you. Each type has its own advantages and disadvantages, and knowing which one is best suited to your restaurant’s needs can help you save money and reduce your overall debt. Below are the most common types of equipment financing:

a. Equipment Loans

Equipment loans are a straightforward way to finance the purchase of new or used equipment for your restaurant. In this case, you take out a loan from a lender to cover the cost of the equipment. You then pay back the loan over a fixed term with interest. The equipment itself often serves as collateral for the loan, meaning that the lender can seize the equipment if you default on the loan.

Pros:

• Ownership: Once you complete the loan repayment, you own the equipment outright.
• Tax Benefits: In many cases, you can deduct the cost of the equipment on your taxes.
• Predictable Payments: With fixed payments and terms, it’s easier to plan your cash flow.

Cons:

• Down Payment: You may be required to make a down payment before receiving the loan.
• Approval Requirements: You’ll likely need a good credit score and financial history to be approved for an equipment loan.

b. Equipment Leasing

Leasing allows you to rent the equipment you need for a set period, usually two to five years. At the end of the lease term, you have the option to either return the equipment, renew the lease, or purchase it at a discounted price.

Pros:

• Lower Initial Payments: Leasing typically requires little to no down payment, making it a good option for new restaurants with limited capital.
• Maintenance Included: Some leases include maintenance and service as part of the contract, reducing the total cost of ownership.
• Upgrades: Leasing allows you to easily upgrade to new, more advanced equipment at the end of the term.

Cons:

• No Ownership: Unlike loans, leasing doesn’t result in ownership of the equipment, so you don’t build equity in the items.
• Higher Long-Term Costs: Over the life of the lease, you may end up paying more than you would if you purchased the equipment outright.

c. Vendor Financing

Many restaurant equipment suppliers offer financing directly through their own financing programs. Vendor financing can be an attractive option because it is often easier to obtain than traditional bank loans or leases.

Pros:

• Convenience: You work directly with the supplier, and the financing process can be faster and more streamlined.
• Flexible Terms: Vendor financing might offer more flexibility in terms of down payments and repayment terms.

Cons:

• Higher Interest Rates: Vendor financing often comes with higher interest rates compared to loans from banks or other financial institutions.
• Limited Options: You are limited to the supplier’s equipment selection, which might not always suit your specific needs.

d. SBA Equipment Loans

The U.S. Small Business Administration (SBA) offers loan programs that can be used to finance equipment purchases. SBA loans typically come with lower interest rates and longer repayment terms, making them an attractive option for restaurant owners.

Pros:

• Lower Interest Rates: SBA loans tend to offer competitive interest rates.
• Longer Repayment Terms: Repayment terms can be extended, reducing your monthly payments.

Cons:

• Lengthy Application Process: SBA loans can take longer to get approved for, which may not be ideal for urgent equipment needs.
• Strict Eligibility: You need to meet specific requirements, such as a good credit score and a solid business plan.

How to Choose the Right Financing Option:

Choosing the best financing option depends on several factors:

• Your Restaurant’s Financial Health: If you have strong credit and a stable cash flow, an equipment loan may be the best choice.
• The Equipment You Need: If you need expensive or specialized equipment that might quickly become outdated, leasing or vendor financing may be more beneficial.
• Your Long-Term Goals: If owning equipment is important to you, a loan or SBA financing might be the better route. If you prefer flexibility and minimal upfront costs, leasing could be the ideal option.

2. Know How to Improve Your Chances of Approval

The financing process can be competitive, especially for new restaurant owners. Lenders and leasing companies want to ensure that their investment is secure, so they will assess your business’s financial health before approving a loan or lease. To improve your chances of approval, consider the following steps:

a. Prepare Your Financial Documents

When applying for restaurant equipment financing, you will need to provide a variety of financial documents to demonstrate your business’s ability to repay the loan. These documents may include:

• Business Tax Returns: Lenders want to see your tax returns for the last two or three years to evaluate your profitability.
• Personal and Business Credit Scores: A solid credit score, both personal and business, can significantly improve your chances of getting approved. Make sure to check your scores beforehand and address any issues if needed.
• Financial Statements: Provide up-to-date profit and loss statements, balance sheets, and cash flow statements.
• Business Plan: If you’re a new restaurant, a well-thought-out business plan can be essential in showing lenders that you have a clear strategy for growth and repayment.

b. Establish Your Business Credit

If you haven’t done so already, start building business credit. Having a separate business credit profile allows lenders to assess your restaurant’s financial stability without focusing on your personal credit. To establish good business credit, apply for a business credit card and pay bills on time. Establishing relationships with vendors and suppliers that report to business credit bureaus can also help build your credit history.

c. Leverage Collateral

If your restaurant is established and has valuable assets, offering collateral (such as real estate or equipment) can improve your chances of securing financing. Collateral reduces the lender’s risk by providing something of value in case of default.

d. Show Steady Cash Flow

Lenders want to know that your restaurant has consistent revenue and cash flow to make monthly payments. Be prepared to provide financial records that demonstrate your business’s profitability and stability.

e. Be Transparent

Honesty is key when applying for restaurant equipment financing. If your business has any issues, such as a history of bankruptcy or outstanding debt, be upfront about it. Lenders are more likely to approve a loan if they feel you are transparent and willing to work with them to find a solution.