Renting, Leasing or Buying? What's Best for Commercial Kitchen Equipment?
Outfitting a commercial kitchen is exciting. But it's also expensive. In fact, it can be substantially more costly than the rest of the restaurant combined. So, it makes sense to spend some time researching how to set up a professional, efficient commercial kitchen.
During your research, you'll come across advice that says that it's better to lease equipment than it is to buy. And you'll come across advice that says it's better to buy outright than to lease. And then you'll get the people who demand you should always just rent. It's confusing and contradictory.
The answer is not as simple as 'rent', 'lease' or 'buy'. In fact, there are situations where renting is the better option, situations where leasing is the better option, situations where buying is the better option and situations where it really just depends. Let's take a look.
What is Leasing?
Renting commercial kitchen equipment is just like renting an apartment. You pay a monthly fee, and you're allowed to use the equipment. But it remains the property of the person you're renting it from.
Leasing on the other hand, is like renting, in that you're paying a regular fee over time, but at the end of the term of the lease, you'll have the option to make a final balloon payment and buy the item outright.
Leasing Kitchen Equipment
Equipment that has a shorter life span is generally better for leasing. This includes appliances such as dishwashers - the types of machines that are constantly being developed with the latest technology. Renting or leasing makes it easier to upgrade to the newest models.
Benefits of Renting and Leasing
Cheaper Initial Outlay
Both leasing and renting have a lot of benefits. They're certainly a cheaper initial outlay, especially when it comes to your large kitchen appliances. In fact, you can save thousands of dollars initially, which means you'll have better cashflow in the early days of your business to use as you need.
Repairs and Upgrades
Often with leased and rented equipment, repairs are included in the monthly payment. So, if it breaks, you won't be required to pay for its repair.
In the same way, because you haven't bought the item, it's easier to upgrade. Once your lease or rental term is up, you simply return the one you've got, and get the newer version, without the headache of selling your old equipment.
Some financiers, like SilverChef, will let you upgrade your equipment at any time so you don't have to wait until the end of your contract term if you need to scale up to meet demand.
You Get New Products
If your only other option is buying second-hand, consider leasing or renting. Although some items are generally OK to buy at auction or via a fire sale, and this can save you a lot of money, buying used can cost you more money in the end.
Used items don't typically come with a warranty that can help you to avoid costly and unnecessary expenses for repairs. And some items simply aren't suitable to buy second-hand.
Used appliances may also be less energy efficient, increasing the size of electricity bills. Old or slow appliances can impact the efficiency of kitchen staff too, and can add to wastage costs from spoiled goods if equipment fails.
Easier Financing
Finally, it's often easier to get a much-needed piece of equipment quickly by renting or leasing. Going through the process of getting financing through a bank can take a long time, and leave you in the lurch. However, since this is the main job of the rental or leasing company, they will be much more responsive and get you back to business speedily.
There may be some benefits to renting or leasing your equipment when it comes to tax time, depending on your situation. Talk to your accountant or tax advisor about off-balance sheet treatments, instant asset write offs and input tax credits to find out whether you can save on your tax bill.
Things to Consider When Renting or Leasing
Continuous Monthly Outlay
The benefits of leasing seem really great, and this might be tempting on paper because it's a more cash flow-friendly option. But in almost all circumstances it will cost less in the long run to buy than to rent or lease.
Renting or leasing any property means you can spread the cost of your equipment over time, but in the end the total will be more than if you'd paid with cash up front.
Balloon Payment
With leasing in particular, at the end of term of the lease, you'll be required to make a balloon payment in order to buy the product outright. This is something you'll need to budget for, so you don't get caught out by the lump sum payment at the end.
Higher Interest Rates
Additionally, the interest rates of the leasing company can be very high – higher than they would be if you took out a loan from the bank to purchase the same piece of equipment. You'll want to ensure you do your research and negotiate the terms before committing to anything.
Contract Terms
Be sure to check the contract terms carefully as well. You'll want to know what happens if you need to break your contract early, or want to upgrade sooner. Sometimes you may be hit with a break lease fee or some other charges. It's best to factor that into any costs when considering whether leasing is right for you.
Buying Kitchen Equipment
Buying your commercial kitchen equipment outright means a one-time payment and then you own the equipment. You can buy both used and new equipment. The best equipment for buying outright should have a longer life span and be central to your business endeavour. This would include appliances such as oven ranges.
Benefits of Buying Outright
Saves Money in the Long Term
Buying your commercial kitchen equipment outright generally saves you money over the long term. You don't have to pay interest rates, charges or fees. It also helps you manage your cashflow over the longer term, because you have fewer monthly payments to make, whether rental or leasing.
Flexible
Because the equipment is yours, you can feel free to do what you like with it. If you think a pizza oven is great for frying up omelettes, you can use it for that (just check your warranty if you have one). This gives you flexibility and autonomy.
You Have Control
When you buy, you have greater control over what you are getting. When leasing or renting, you'll be limited by the stock that the rental or leasing company has on hand. Instead, when buying outright if you want a particular brand or model, you can simply order that.
Financiers such as SilverChef allow you to choose whichever brand or model you want at your chosen dealership, and then rents it to you. So there's no limit or restrictions to the equipment you can choose.
Solve Problems Quickly
If you have a problem or your product needs a repair, you can handle this quickly yourself, rather than waiting for the rental or leasing company to come in and take a look at a time that suits them.
Tax Deductions
If you buy equipment new, its value will continue to depreciate over time. You may be able to claim depreciation costs as a tax deduction.
Easy Experience
Buying outright means you don't have to deal with ongoing contracts, maintenance visits or other time consuming interactions.
Things to Consider When Buying Outright
Initial Cash Outlay
Buying a product outright will be more expensive initially, but it will be a single one-off payment. However, with your more expensive products it can certainly be difficult to find the cash to make those payments. In those cases you may need to obtain financing to allow you to purchase the item. Or you may need to settle for a lower cost or lower quality item.
Repairs and Maintenance
Repairs and maintenance are your responsibility. While you may be able to handle this more quickly than another company, you'll still be on the hook for paying for any services, and for organising them as well.
More Difficult to Upgrade
It can be more difficult to upgrade your kitchen equipment because you can't just hand it back. You'll likely need to on sell it first before you can get the newer model.
Leasing vs Buying - Which Should I Choose?
At the end of the day, what's 'best' really depends on what is best for you. Buying outright is generally the cheapest long-term option, but sometimes that's simply not viable.
Leasing means you'll get to keep the item at the end of the lease term (pending making that final payment), so at least your payments are going towards your owning the equipment.
Renting is best when your cashflow is low, you're in start-up mode with limited funds or for products with a shorter lifespan.
Run the numbers. Think about what you need to run your business in the black. Then choose the items and the payment method that will help you achieve those goals.
TIP: Always consult with your accountant or a qualified professional for advice on purchases. It is important to have a full understanding of how any large purchase will affect cash flow and finances, as well as the impact on your business plan. This article does not constitute financial advice.