To lease or not to lease: 5 tips, if that is your question (Part 1 of 2 on restaurant financing issues)

| by S.A. Whitehead
To lease or not to lease: 5 tips, if that is your question (Part 1 of 2 on restaurant financing issues)

According to the Manufacturers' Agents Association for the Food Service Industry, a restaurateur's largest annual expenditure for equipment  goes toward refrigeration and ice-making units, which comprise approximately 32 percent of dollars spent. Following closely behind that is cooking equipment, which consumes another 27 percent of the equipment budget.

The remaining 50 percent goes to a variety of accoutrements, such as storage, food handling, preparation and serving equipment, and ware-washing and sanitation tools.

In short, it isn't cheap. And in a business that demands a steady and relatively liquid cash flow, leasing equipment can make a lot of sense. Here, with a little help and information from MAFSI research and LeaseQ Vice President Cory Damm, are pointers on what to consider for leasing and when.

1) High-dollar, short-life equipment might be a better deal when leased

The ice machine is broken ... again, right? Maybe it's trying to tell you something. According to Damm, items with notoriously short life spans, like ice machines, can be good candidates for leasing since they often come with maintenance contracts that will sub a machine if one of yours goes down. 

In fact, Damm said that the three main types of equipment restaurant chains most frequently lease from his firm involve lots of technical maintenance or know-how (e.g., some point-of-sale systems), or heavy maintenance to ensure safe and accurate operation (e.g., refrigeration and ware-washing). 

"All of these machines typically need constant maintenance and/or replacement on 5-year cycles, which make them natural assets for acquisition by lease," he said in an interview with this website.

2) Enter a lease with eyes wide open

Know what services are provided by your leasing arrangement, how often they are rendered and by whom. For instance, if the item you're leasing requires constant recalibration, cleaning, refilling or other upkeep, make sure that your lease clearly delineates exactly what is provided, how often and by what kind of professional. It could make the difference between a deal and a dead, or even deadly, end. 

3) Can you get a lease deal with that product?

Distributors of perishable and restockable product  — including coffee — often provide preparation or storage equipment for their perishable products at no additional charge with a contractual commitment. Keep your mind open to these options for areas to cut costs without cutting corners. 

4) Could a leased machine save you operationally? 

Another consideration is whether a big-ticket item that you couldn't buy, but can lease, might also save you operational costs. For instance, Damm said the greatest asset of any kind of leased equipment is energy efficiency. 

"Everyone is focused on efficiency, be it energy savings or operation automation," he said. "It is important for the restaurateur to ensure that they are squeezing as much cost out of operation as possible. New advances in both energy of appliances and opening and closing automation procedures help to do just that."

You can go online to calculate potential savings provided by specific equipment models. The U.S.  Environmental Protection Agency and Department of Energy and EnergyStar provide a savings calculator that can help you figure out how much you stand to gain in energy savings by switching to more efficient appliance model. 

Don't go into a leasing situation unprepared

Among restaurateurs seeking financing or leasing qualification, the biggest stumbling blocks Damm sees are bad payment histories and too little liquidity, which can set up an operator for failure or, at the very least, high entry costs. 

Damm strongly recommends that anyone planning to lease equipment first do a little maintenance on their financial image. Credit histories that are rife with late payments, could cost an applicant dearly in a leasing arrangement or even prevent that individual from leasing at all. 

"The most common challenge operators unknowingly get themselves into trouble with is slow pay histories," said Damm. "Today's connected environment is allowing creditors and ratings agencies to collect more information from more sources than ever before. Slow pay histories to your vendors affect your corporate credit rating [and] corporate credit rating is a key component to securing the best cost of funds. Not just your current loan and lease debt obligations, but timely vendor payments are equally as important."

Slow pay histories are, of course, an indication that a restaurant has a cash flow problem, an issue that equipment leasing can help prevent in the first place.

Liquidity is one asset that can keep a chain viable and eligible for all kinds of investment or borrowing opportunities. In the second part of this report tomorrow, a major food service financier will outline top tips for restaurateurs seeking to borrow money to start their dream restaurant — or grow one they've already made a reality.

Topics: Business Strategy and Profitability, Equipment & Supplies, Financial News, Financing and capital improvements

S.A. Whitehead

Award-winning veteran print and broadcast journalist, Shelly Whitehead, has spent most of the last 30 years reporting for TV and newspapers, including the former Kentucky and Cincinnati Post and a number of network news affiliates nationally. She brings her cumulative experience as a multimedia storyteller and video producer to the web-based pages of and after a lifelong “love affair” with reporting the stories behind the businesses that make our world go ‘round. Ms. Whitehead is driven to find and share news of the many professional passions people take to work with them every day in the pizza and quick-service restaurant industry. She is particularly interested in the growing role of sustainable agriculture and nutrition in food service worldwide and is always ready to move on great story ideas and news tips.

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