Restaurant equipment financing and how to handle it

Restaurants are a tough business. Many people still believe that 90% of restaurants fail their first year. However Adam Ozimek, a Forbes contributor, explored that myth and claims that only 17% of restaurants close their doors within the first year. Ozimek also states that many of the restaurant that closed were profitable at the time. The closings could be due to family issues, retirement, or simply transitioning into a new industry. No matter what the restaurant lifespan statistics are, we cannot deny that Americans love to dine out. In fact, CNBC reported in 2017 that 90% of Americans do not like to cook.

Restaurant owners may find themselves desperate to replace outdated equipment or upgrade existing equipment. There is still hope to find financing, so let us explore a few of the financing options available.

Traditional Bank Loan

Traditional banks will generally offer the best rates available but only to very well-qualified borrowers. To qualify, the banks will want excellent credit, collateral, a 20% down payment, and proof of profitability. Oftentimes, the equipment alone will not be enough collateral, and the bank will require additional collateral to approve the loan. The lengthy approval process and strict requirements make bank loans difficult for some borrowers to obtain.

Small Business Administration (SBA) Loan

The traditional bank process can take a very long time. If you have less than perfect credit or the money now, traditional banks are not a good option. The SBA loan process is notoriously lengthy as well. However, the SBA Express loan program will expedite the application process. This loan option is found under the SBA CDA/504 loan program, which is probably the best loan for restaurant equipment.  The SBA loan program works with lenders and guarantees the loan, making it easier to qualify.

Business Line of Credit

A business line of credit can be a great option to finance restaurant equipment. The beauty of a line of credit is you only use what you need. Therefore, you will only be charged interest on the amount used. It is similar to a credit card but usually has lower interest rates. However, since this is an unsecured loan, lenders do have stricter requirements even if it is backed by the SBA.

Equipment Financing Loan

Equipment financing uses the equipment as collateral for the loan, and the approval process is super quick. The downfall is the interest can skyrocket up to 30%! These loans are considered high-risk and the interest rates generally reflect that. Another downfall is the equipment could become outdated before the loan is repaid which can cause problems when it is time to replace the equipment again. Due to the high interest rates, this should be the last option to consider.

No matter which financing option you choose for your restaurant equipment, you will need to know how to qualify. To qualify for the best rates, you will need good credit, proof of profitability, and a down payment of 20%. It is also important to know the lifespan of the equipment before you look for a loan. Typically, the financing term should not exceed the lifespan of the equipment.