We’ll discuss some of the advantages of leasing or purchasing your equipment when you first start your cafe up. We don’t claim to be law experts, tax advisors or financial fiduciaries, however there are some major benefits and disadvantages to leasing equipment. Let’s start with the good.
The good part of leasing your equipment.
Duh. But seriously, to outfit an entirely new cafe; it’s a bare minimum to consider:
Automatic Drip Coffee Machines, A quality espresso machine, a commercial burr grinder, refrigeration system, containers, pumps, ovens toasters, freezers blenders etc. (1)
You’d be lucky to get out with all of that, for under $50k…. and this is not everything! Leasing could be a monthly payment, that is a lot more manageable as opposed to having to come up with that cost all up front. For a 50,000 lease, your payments could be as little as 1,200-1,5000 a month. This gives you opportunity and margin for the unexpected.
While we are not claiming to be tax advisors, in most cases, your lease payment could be considered a tax deductible operating expense. You also don’t have to pay taxes for the entire cost of the item up front, with a lease. It’s spread out over the life of the lease.
Generally speaking, leasing equipment tend to come with better warranties, that last longer, then buying it outright. If the equipment breaks, you likely won’t have to pay for the repairs.
– A word to the wise, you should always review your lease terms before you sign anything.
If you are lucky enough to have some equipment that makes it through the years unscathed, you should be able to but the item for next to nothing. Then consider buying another one for a rainy day (or transfer that lease onto a new item)
The bad part of leasing.
It makes a lot of sense to lease items that depreciate in value quickly, or leverage technology that becomes antiquated often. The bad part of leasing however, is that you cannot take a tax deduction on the depreciated value of the leased equipment.
High interest rates.
Most people don’t have perfect credit, so the interest rates that come with these leases often are higher than even a bank loan. (Yes, they will have to check your credit, as with any other type of lease). The reason that it may make more sense to do a lease as opposed to a loan however, is that you can claim equipment leases on your taxes, but you cannot claim loans. (As a reminder, check with your tax accountant on the benefits of leases vs loans)
Not all leases end with you actually owning the piece of equipment. This could mean having to pay for your equipment at the end of the lease, or ever worse never-ending payments.
Most leases also do not allow you to buy out your lease early. Business is going GREAT, you have some capitol coming in and you really want to start paying down your operating expenses for higher margins; too bad.
What we would recommend.
At the end of the day, every situation is different and you have to make sure you choose the best path for you and your financial setup. It’s not fun getting a call that both your grinders are jammed and aren’t working or that your freezer is temping at 50 degrees and all your ice cream and fruit has melted into a puddle in your storage room. Service calls are expensive and even once machines are fixed they are still bound to go down once again after a certain age.
Consider other options too, like buying used equipment, or scratch and dent equipment. There are even some companies that will offer you free interest on equipment if you purchase their coffee related products.
The end goal, is to become financially able to have a spare piece of equipment on hand and have the ability to switch your equipment before you find yourself spending all your time fixing old equipment.