Picture this. Mr. Smith, the owner of an upcoming restaurant in the suburbs thought he had reason to celebrate. He had signed an unbelievable $400, 000 lease agreement covering kitchen equipment, networking equipment such as software, computers, etc. He believed he had snagged an incredibly low lease rate. The lease proposal offered a return of 2% “commitment fee” paid by Mr. Smith and a lease closing if the lessor did not give a credit approval in a span of fourteen days.
Little did Mr. Smith know that after signing the lease agreement, he would spend thousands of dollars in legal fees seeking lessor performance. He had landed himself in what was known as the “Twilight Zone” of equipment leasing. He later found out that the lessor was mired in many other similar lawsuits and was already insolvent.
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Like Mr. Smith, thousands of U.S restaurant owners lease restaurant equipment each year and most of them do not pay extra attention to potential blunders. Mr. Smith became a victim to some of the possible pitfalls of equipment leasing simply because he was lured into a lease agreement by going for the lowest rate. Below are a few lessons that Mr. Smith and other restaurant owners should learn before they make any financial decisions.
1. Do Not Fall For The Lowest Rate
Don’t base your restaurant equipment leasing decision solely on the lowest finance rates. It makes very little sense given that these rates only give you part of the picture of the total cost of the lease.
The outcome of the lowest lease bid can change very fast when you factor in other fees such as security deposits, monthly payments and upfront lease payments.
Even when you use the leasing company’s lease calculator, the numbers it generates fail to consider several factors. Therefore, when you compare equipment lease rates without an accurate price comparison, you will be comparing lemons to oranges instead of oranges to oranges.
To avoid making this blunder, consider other factors such as tax considerations, balance sheet considerations, finding the right leasing partner and avoiding severe leasing provisions.
2. Underestimating Time Needed To Close Lease
You can easily incur extra costs by not allowing enough time to go through the lease planning, proposal and approval processes. When the lease approval process is rushed, it usually leads to poorly negotiated terms, documentation miscues, approval delays and poor leasing company selection.
Small lease transactions (under $100, 000) take a shorter time to be processed. Bigger transactions can take up to three weeks to be approved. Your application has to go through a credit review process and bidding. Other factors that might take a lot of time include negotiating and reviewing the lease agreement, filing financing statements and getting insurance certificates.
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The best way to hasten the process is to plan ahead. Have a reasonable criteria for the lease you are asking for, prepare a package containing details all potential lessors would like, obtain a lease proposal from all of your potential lessors and respond to their queries in a timely manner.
3. Failing To Understand The Lease Contract
Scheming through major terms and conditions can cost your restaurant a lot of money. While most lease contracts have similar terms and conditions, some of them contain noticeable differences.
For example, some lease agreements may require you to de-install, pack and ship the equipment to destinations within the U.S and this can be quite costly. Some of these terms can easily be negotiated. If you do not understand some of the terms in your lease, you should ask a trusted legal or financial advisor.
While it is normal to go for the lowest rates when trying to find out how much it would cost you to finance restaurant equipment, you should consider some of the risks that come with leasing. Equipment leasing pitfalls are what cost many restaurant owners like Mr. Smith, extra money. While some of these pitfalls cannot always be avoided, you should take the necessary steps to ensure you do not cost your restaurant large sums of money.
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