Restaurant Equipment Financing: Kitchen Packages, Leases and Loans Compared

What a restaurant equipment package includes

A full-service kitchen package typically includes cooking equipment (ranges, griddles, fryers, convection or combination ovens, charbroilers), refrigeration (a walk-in cooler and freezer, reach-ins, prep tables, under-counter units), warewashing (a dish machine and sinks), an ice machine, and the exhaust hood with its fire-suppression system. Point-of-sale terminals, espresso machines, pizza ovens and bar equipment are often financed on the same agreement.

Lenders treat freestanding, plug-in or gas-connected equipment as movable collateral they can recover. Installed systems are different. A walk-in assembled on site, a hood ducted through the roof, or a grease interceptor below the floor becomes part of the building, and some lenders will finance them only as part of a larger package, with a larger down payment, or not at all. Ask early whether installed items are covered, and price installation separately on the quote.

Leasing versus an equipment loan

With an equipment loan you own the equipment from day one, the lender holds a lien until the loan is paid, and you can sell or replace pieces once the lien is released. With a lease the finance company owns the equipment and you pay to use it for a set term. Restaurant leases come in two main forms, and the end-of-term option is what separates them.

A $1 buyout lease, sometimes called a capital lease, lets you buy the equipment for a nominal amount when the payments end. Because you are effectively paying the full cost plus finance charges, its monthly payment is close to or above a loan’s. IRS Publication 225 describes how an agreement with a nominal purchase option, or payments that add up to the price plus interest, can be treated as a purchase for tax purposes rather than rent. Treat a $1 buyout lease as financing a purchase, and confirm the tax treatment with your accountant.

A fair market value lease sets a lower payment because the lessor expects the equipment to keep part of its value. At the end you can return it, renew, or buy it at its then-current market value. That suits equipment you expect to replace on a cycle, such as POS hardware or a combination oven you plan to upgrade. If you intend to keep the equipment for its full life, an FMV lease plus the purchase at the end can cost more than a loan or a $1 buyout.

Financing a new opening versus a remodel

A restaurant that has not opened yet has no sales to show, so lenders lean on the owner’s credit, industry experience, the lease on the space and the equipment as collateral. Equipment financing for a first location is possible but usually comes with a larger down payment and a rate toward the top of the published 7 to 30 percent APR range. Owners who have run kitchens before, or who are opening a second location, get noticeably better terms.

A remodel or expansion at an operating restaurant is a simpler file. Lenders can read the bank statements, card-processing volume and tax returns, and the payment can be measured against real sales. Remodels often mix equipment with construction such as plumbing, electrical and flooring. The construction portion is usually better funded with a term loan, an SBA loan or cash, while the equipment portion goes on an equipment loan or lease.

Used and refurbished restaurant equipment

Restaurant closures keep a steady supply of used equipment on the market, and buying used stainless tables, sinks, shelving and some cooking equipment can save a large share of the cost. Lenders will finance used equipment bought from a dealer that provides an invoice with model and serial numbers. Private and auction purchases are harder to finance. Refrigeration compressors and dish machines carry more risk when used, so ask for service records or a short dealer warranty.

Terms on used equipment are usually shorter, often 24 to 48 months, and some lenders cap the share of a package that can be used. A practical approach is to buy new where failure would shut the kitchen, such as refrigeration and the main cooking line, and used where the item is simple steel.

Energy-efficient equipment and operating cost

Utility bills are a fixed cost that equipment choices can lower for years. ENERGY STAR estimates that outfitting a commercial kitchen with a suite of certified food service equipment could save operators about 350 MMBtu, or about $4,000, a year. Certified categories include refrigerators and freezers, ice makers, dishwashers, ovens, griddles, fryers, steam cookers and hot food holding cabinets. Its website also lists rebates sponsored by utilities and other partners by ZIP code.

When a certified model costs more up front, compare the added monthly payment with the expected monthly saving. A rebate can reduce the amount financed if it is applied at purchase, or arrive later as cash. Ask the dealer which applies before you size the loan.

Worked example: a $138,470 kitchen package three ways

Hypothetical, not an offer. An operator opening a second location prices a kitchen package at $138,470, including a hood and fire-suppression system, a walk-in cooler and freezer, a six-burner range with oven, two fryers, a combination oven, reach-ins, a dish machine and an ice machine. Financed with a loan of the full amount at 12.5 percent over 60 months, the payment is about $3,115 a month and total payments about $186,917. With 10 percent down, $13,847, the loan falls to $124,623 and the payment to about $2,804.

Hypothetical, not an offer. A $1 buyout lease on the same package with an implied rate of 15.8 percent over 60 months costs about $3,353 a month, about $201,158 including the $1. An FMV lease at the same implied rate that assumes the equipment is worth 14 percent of its cost, about $19,386, at the end lowers the payment to about $3,139, or about $188,310 over the term. Buying the equipment at that assumed value would bring the FMV total to about $207,696. Payments are shown at the end of each month; leases that bill in advance will differ slightly.

Hypothetical, not an offer. A smaller operator who buys $41,260 of used refrigeration and stainless from a dealer and finances it at 14.9 percent over 48 months pays about $1,146 a month, about $55,018 in total.