It takes a lot of capital to launch and maintain a restaurant, from outfitting a commercial kitchen in the back of house to incorporating a point-of-sale system at the front of house. Fortunately, restaurant equipment financing spreads out some of these high costs over time, which can really help if you’re opening a new location or responding to an unexpected equipment failure.
Here’s what you need to know about your options for buying or leasing restaurant equipment and how to make that financial decision.
Key Points
• Equipment loans, SBA loans, working capital loans, and leasing programs offer flexible financing for restaurant equipment.
• Equipment loans typically use the purchased items as collateral, reducing down payment requirements.
• There are pros and cons to consider when choosing between new and used equipment.
• Working capital loans are ideal for smaller, short-term financial needs.
• Leasing avoids large upfront costs but does not build equity in the equipment.
Financing Options
What’s the best way to finance restaurant equipment? There are four primary options available, whether you’re grilling up burgers and fries or serving a curated tasting menu.
Equipment Loans
Equipment loans are available from online lenders, traditional banks, and even vendors who offer in-house financing. Because the equipment is used to secure the loan, you could avoid having to make a large down payment, enabling you to save your working capital for other expenses. Interest rates are usually fixed, giving you the same monthly payment for the life of the loan.
A similar alternative is a business line of credit, which often comes with a variable rate. The other difference is that you can borrow as needed up to your available limit, instead of receiving a lump sum. A line of credit could be helpful if you plan to spread out purchases or want an emergency fund in place for equipment maintenance and replacements.
An equipment loan or line of credit may let you roll in some or all of your soft costs, such as taxes and delivery fees. Equipment leases typically allow for this.
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Leasing Programs
Leasing vs. purchasing equipment for your restaurant could save you money. You’re only making payments to cover the lease period, rather than being on the hook for the full cost of the equipment. When the lease ends, you can return the items; if your contract includes a buyout clause, you may be able to purchase the equipment at that time.
Among the drawbacks of leasing restaurant equipment: Your payments don’t add up to any equity in the items, so you can’t resell them or use them as collateral for future borrowing. Also, your long-term costs, including financing charges, could be higher than if you were making principal and interest payments on a purchase loan.
SBA Loans
Restaurants can apply for small business financing that is backed by the SBA, which may have more flexible credit requirements than other loan types. An SBA 7(a) loan allows businesses to borrow up to $5 million from a direct lender. Those funds can be used for a number of purposes, including machinery, equipment, fixtures, and furniture. You do, however, need a 15% to 25% down payment on the loan amount.
SBA 504 loans are another option which can be used for any type of machinery or equipment with a remaining useful life of at least 10 years. The maximum loan amount is $5 million and lenders often require a minimum down payment of 10%.
Working Capital Loans
A working capital loan isn’t specifically designed to finance equipment; you can use the money to cover any needs in your restaurant. The loan term and amounts are usually smaller than for equipment financing that covers larger purchases. So if you need funding to buy smaller appliances or point-of-sale equipment, a working capital loan could be a good choice.
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Qualification Requirements
Lenders look at three key factors related to your restaurant as part of the application review process.
Credit Considerations
You’ll often need to go through both a personal and business credit check as part of the application process, regardless of which type of restaurant equipment financing you choose. But there’s no universal credit score requirement; each lender has its own criteria.
It’s even possible to get bad credit equipment financing, especially when the equipment itself is collateral. If you can also offer additional collateral or a down payment, you may have a better chance of getting approved.
Time in Business
It can be difficult to obtain a loan for a new restaurant with no previous revenue history. Typically, you’d need to have been in business for at least a year to qualify, but by comparing multiple lenders, you may find one with more flexible criteria. New restaurant owners can also explore startup business loans to finance their equipment purchases.
Revenue Requirements
Revenue requirements also vary by lender. Many cite minimum annual revenues of $100,000 to $200,000, although you may find lenders who accept less.
The amount you can borrow — and repay — will largely depend on the restaurant’s revenue and outstanding debt. The more cash flow you have, the larger the loan you may be able to handle. Expect to provide financial documents like tax returns and bank statements as proof of revenue.
New vs Used Equipment
When you’re deciding on the equipment you want to purchase or lease, bear in mind that both new and used options have their pros and cons. New equipment can be more reliable, and sellers sometimes offer perks like warranties and rebates. Also, you’ll typically qualify for better financing terms if you choose new equipment rather than used. However, if the new equipment is more expensive, then your overall cost may end up being higher. If upfront prices are your top priority, then secondhand equipment may be a better bet.
Tips for Choosing the Best Financing Option
First, think about whether you prefer to buy or lease your equipment. Buying may be a wiser option if you expect the equipment to last well beyond the term of the loan. Leasing could be preferable if you like to upgrade to the latest equipment every few years.
Next, look at lender requirements and compare multiple options that you could potentially qualify for. Different financing companies typically set up their own terms and loan structures, so you shouldn’t rely on only one quote when making a decision.
The Takeaway
When it comes time to outfit your restaurant space, equipment financing can help preserve your working capital. Government loans are available, as are direct loans and restaurant equipment leases. Lenders typically have requirements for borrowers’ revenue, credit, and time in business.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
What credit score do I need for restaurant equipment financing?
Credit score minimums for restaurant equipment financing vary by lender. Lower scores may qualify if you can provide additional collateral or a larger down payment.
Should I lease or buy restaurant equipment?
Whether you should lease or buy restaurant equipment depends on whether you plan to use it beyond the payment term. Lease payments don’t go toward equity in the equipment, but you may still be able to purchase the item after the lease agreement ends.
Can I get financing for used equipment?
Yes, you can get used equipment financing for your restaurant, but the interest rate may be higher. Additionally, the loan term may be shorter since used equipment will likely not last as long as the new version.
What documents do I need to apply?
Lenders require a variety of business documents, including tax returns and financial statements. You may also be asked to supply details on the equipment you plan to purchase and how it will affect the restaurant.
How long can I finance restaurant equipment?
It depends on the expected lifespan of the equipment itself. The maximum is usually in the 10-year range, but some SBA loans have a longer term, especially for heavy equipment.
Photo credit: iStock/Ugur Karakoc
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