Restaurant owners are finding it challenging to secure installment loans from commercial banks for new foodservice equipment, even with interest rates currently at historical lows. Many have found working with leasing companies to be an agreeable alternative.
There are several factors contributing to the difficulty of getting a loan from your bank for new foodservice equipment:
- Banks must deal with a variety of federal regulations and reporting requirements to financial auditors.
- Interest rates are so low that there is little room for the bank to make a profit/margin.
- Banks are reluctant to write a business loan on a rapidly depreciating asset in a high-risk industry. They prefer lending on assets like real estate that appreciate and can be remarketed.
- Banks don’t need to write loans to make money. Large banks make significant profit from fees and security trading.
You can take steps to secure equipment leasing terms that compare favorably with your bank:
1. Your first priority is to check your credit report from all three reporting agencies:
- Equifax: 800.685.1111 ● www.equifax.com
- Experian: 888.397.3742 ● www.experian.com
- TransUnion: 800.888.4213 ● www.transunion.com
For a closely held company, securing an excellent personal credit report is an important step to receive favorable equipment lease terms. However, a good credit report alone may not get an approval with the lowest rate lender; the amount of credit card debt you have affects your credit score, even if you pay off the entire balance each month.
2. Your business credit score with Dun & Bradstreet is also important. If you have a PAYDEX® score of 65+, you could get same day approval with good terms. (The PAYDEX score is D&B’s unique dollar-weighted numerical indicator of how a company paid its bills over the past year, based on trade experiences reported to D&B by vendors. The D&B PAYDEX score ranges from 1 to 100, with higher scores indicating better payment performance.)
3. When applying for an equipment lease, give installment loans and leases as references rather than a trade supplier. Comparable credit can often be the difference between approval and decline with the best term lender.
4. Consider getting two lease quotes in addition to your vendor’s recommended leasing company to ensure you’re getting the best rate. Important questions to ask the lender:
- How long do I need to own the business to qualify?
- What is the minimum credit score needed for approval?
This should give the leasing company enough information to quote you monthly payments. Expect the following information to make a fair side-by-side comparison:
- Equipment Cost (pre-tax)
- Monthly Lease Payment
- Lease Rate Factor (determined by dividing payment/equipment cost)
- Number of Advance Payments
- End of Lease Purchase Option
- Documentation Fee
- Early Payoff Discount
- Pre-Funding Availability
Contact Kappus for more information about financing new foodservice equipment. We’re here to help!
*Equipment leasing advice based on information from Accord Financial Group