Restaurant Equipment Loan Guide

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Whether you’re purchasing an oven, a stove, or any other kind of equipment for your restaurant, stop wasting time and money searching for financing. This is because there are now more innovative solutions available for restaurant owners to finance their food service equipment needs.

One of the most popular financing methods available are equipment loans. With an equipment loan, it’s often easy to qualify. Another option is an equipment lease offered through multiple lessee companies with competitive rates and flexible terms. Both options are better than traditional retail approaches using credit cards or cash-only purchase options with interest rates that will cost you more in the long run.

Finance Equipment lease

(also also referred to as a capital lease or sales lease ) is a kind of lease where the finance company is usually in the position of being the sole legal owner during the duration of the lease however the lessee does not just have control of the assets, but has a portion of the economic risk and gains from the changes in the value of the asset.

It is a commercial contract where:

Lessee (customer or the borrower) chooses an asset (equipment or software);

the financier (finance firm) will buy the asset.

the leasee will be able to make the use of the asset throughout the term of the lease;

the Lessee has to be required to pay a number of rentals or installments to cover the use of the asset

the lender will recover an entire or a significant portion of the costs of the asset, and earn interest from the rents that are paid by the lessee

The lessee has the option of taking control of the assets (e.g. paying the final rental or the bargain choice purchase cost);

A finance lease is similar in terms of financial features to hire purchase agreements as well as closed-end leasing since the most common result is that the leasee will be an owner at conclusion of the lease but it is subject to different accounting practices and tax consequences. There are tax advantages when a lessee decides in the event that they lease an asset instead of purchase it . This could be the reason to get financing lease.

Accounting impact

Because the lease on finance lease can be capitalized the liability and assets in the balance sheet rise. In the end, working capital remains unchanged, while the ratio of debt to equity increases which creates leverage.

The finance lease expenses are divided between principal and interest value similar to an ordinary loan or bond. thus, in a report of cash flows, some of lease payments are recorded in operating cash flow, while the rest are reported is reported under financing cash flows. Thus, operating cash flow grows.

Operating lease circumstances, lease obligations are not acknowledged, which means leverage ratios are overstated, and the ratios of returns (ROE as well as ROA) are overstated.

The primary IFRS criteria is:

When “substantially every risk and benefits” in ownership have been transferred over to the lessor, it’s a finance lease. If it’s not an operating lease it’s operational lease. Risk transfer to lessee could be shown through lease conditions, such as an option to purchase the asset for the lowest cost (typically its residual price) at the conclusion period of lease. What is the purpose of the asset (whether it will be used by any not just the leasee) as well as the duration of the lease period (whether it is sufficient to cover the entirety of the life span of the item) as well as the current amount of lease payments (whether they pay for the value of the property) could also be elements.

IFRS doesn’t provide an exact set of guidelines to classify leases, and there will be cases that border on the extreme. It is still possible to utilize leasing to help make balance sheet appearance better, provided the lessee is able to justify treating these leases in the same way as operating leases.

The classification of major transactions, like the sale and leasebacks on property can affect the balance sheets and also on indicators of financial stability like gearing. It is also important to keep in mind that an increase in financial gearing can be countered by a decrease of operational gearing, and the reverse.

International Financial Reporting Standards (IFRS)

In the more than 100 nations which regulate accounting with International Financial Reporting Standards, the most important standard is IAS 17 “Leases”. But, it’s currently being eliminated, and will be replaced by IFRS 16 “Leases” to report years beginning in 2019. Although IAS 17 is similar in several ways in many ways to FAS 13 in the U.S., IAS 17 avoids the “bright line” tests (specifying the exact percentage of rent as a maximum) in relation to the lease period and the value of rents. In its place, IAS 17 has the five tests listed below. In the event that any of these requirements are passed then the lease is deemed to be a financing lease:

The ownership of the asset will be transferred to the lessor at the conclusion of the lease term.

The lease includes a bargain purchase option to purchase the equipment for less the fair market price

The lease period is for the majority of the life span of the asset, even the title has not been transferred.

at the time of the beginning of the lease the value at present of minimum lease payments amount to the majority of the fair market value of the asset being leased.

The leased assets are of a special type that only the leasee can make use of them without any major changes being made.

IAS 17 is now transitioning to IFRS 16, as a collaboration along with IAS 17, which is a joint project with the U.S. lease accounting standard. The standard was announced in 2016and companies are having to adopt by the year 2019 or sooner. The criteria to be classified as a lease in finance lease are the same as those mentioned above, but judgment is needed – just satisfying one requirement might not be enough.

United States

Main article Accounting of leases within the United States

In accordance with US accounting standards, a financial (capital) lease is a lease that meets at the very most one of these standards:

The ownership of the asset will be transferred to the leasee at the conclusion of the lease period;

the lease gives the lessee an opportunity to buy the asset, and that the leaseholder is confident that they will exercise this option

The lease term will last for the majority of the remaining economic existence of the asset (75 percent of an asset’s expected useful lifespan or more);

that the value at present of lease payments and any remaining value guaranteed by the lessor is greater than or equal to the majority of the fair market value for the equipment (90 percent of the initial price for the equipment).

This asset has specialization that it is likely to be of no other use to the lender at the conclusion of the lease duration.

In accordance with the GAAP accounting viewpoint A lease is considered to be almost similar to the purchase by the lessor which is then capitalized on the balance sheet. Refer to the statement of Financial Accounting Standards No. 13. (FAS 13) for more information on how to classify and record accounting.

Extra Case Finance leases in accordance with UCC 2A. 2A

The term can refer to the special type of lease that is defined in article 2A in the Uniform Commercial Code (specifically, Section. 2A-103(1) (g)). This type of lease acknowledges that certain lessors are financial institutions or business organisations which lease the products for an accommodation for their financial needs and do not wish to be entangled in the warranty or other entanglements typically in leases from businesses that manufacture or sellers of these goods. In the terms of a UCC 2A finance lease, the lessee is responsible for paying the lease towards the lender (and in fact, must pay the rent regardless of the existence of defects in the leased item and this obligation is usually stipulated in the “hell or high water” clause) However, any claims that arise from defects in the goods leased can only be filed against the manufacturer of the item. UCC 2A finance leases are typically easy to recognize as they usually have a clause that specifically states that the lease is to be a financial lease in accordance with UCC 2A.

Other Restaurant Business Financing Services we can help you with:

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Equipment Loan & Equipment Lease Financing

SBA Loans

AR Financing

Merchant Cash Advance

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Fix N Flip Loans

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Startup Funding

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References:

https://en.wikipedia.org/wiki/Finance_lease

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