What higher interest rates mean for heavy equipment financing

0

Jack felt like he had been punched.

Just a week earlier, he and his partners had agreed to purchase a new heavy excavator that would allow their small business to expand its offerings into areas a local competitor was beginning to abandon.

Jack (whose name has been changed for this story) and his partners narrowed down their preferred choices to two models and agreed to finalize their decision the following week.

However, they did not pay attention to the news. The day before their meeting, June 15, 2022, the Federal Reserve raised interest rates by 75 basis points (0.075). This means that interest rates on all types of loans have gone up.

What this meant to Jack was that the shovel, which they intended to finance, would cost them more, just because of the week they bought it.

To hear Jack tell it, his company ‘lost’, stating: ‘If we had only been careful, we would have sped things up and bought the machine faster and ended up under the wire. It’s like we’re just wasting money now.

The overwhelming feeling of “what if” was so strong that Jack and his partners nearly ended their plans. It took some serious thinking about the big picture before they finally agreed that it was still worth pursuing with their purchase, despite the higher rate.

This story is not unusual in an environment like the one we have right now. When rates rise, lenders see a sharp drop in loan applications and spending (which, of course, is the whole point of the Fed’s rate hike).

Obviously, some of the “withdrawals” are entirely justified – if the financials of any loan depended entirely on the rate being a certain number, and that number increasing, it clearly makes little sense to move forward. .

But it is the “we lost” reason that deserves consideration.

Historically, the interest rate pendulum swings very slowly. Periods of rising and falling rates take months, and in most cases years, to peak and reverse. Listening to what the Federal Reserve is saying right now, it’s highly unlikely that the recent rate hike will be the last. Almost all economists agree with this – we are likely to see rates rise for the foreseeable future.

What does this mean for the “we lost” thought process? That means it will happen again, and again, and again.

But it also means that the reverse is true. Suppose you were in Jack’s shoes and went ahead even after that 0.075% increase, what does that mean for the next three rate increases?

Doesn’t that mean you won? Really, think about it for a minute.

Right now, even with the most recent increase, interest rates are still historically low. We’ve had incredibly low rates for almost a decade now.

For those who remember, the fed funds rate was above 5% for most of the 90s. And the first decade of the millennium had its ups and downs, with rates around 4-5% for almost half of it. So even with the recent increases, we’re nowhere near that yet (at the time of this writing, the fed funds rate is still below 2%).

Yes, rates are higher than they were a few months ago. And in a few months they will probably be even higher. It may be a long time before we return to 2020 rates, if we ever do.

The cautionary tale here is to not let your mindset be affected too much by missing an appointment and paying a higher rate than yesterday. By all accounts, there are still plenty of “I came in when it was lower” victories up for grabs for the remainder of 2022 and into 2023.

Today’s business climate is tough enough, but making (or not making) decisions because of what could have happened yesterday doesn’t make much sense. Yesterday is more focused on tomorrow.

Although it is 0.75% higher than before, the rate we have now is probably the lowest we will see for some time. Whether you win or lose in this environment, it’s 100% perspective-based action.

Chris Fletcher is Vice President of National Accounts at Crest Capital, which provides small and medium-sized businesses with financing for new and used equipment, vehicles and software. Visit them online at www.crestcapital.com

All opinions expressed in this article are those of the author and do not necessarily represent the policy or position of Crest Capital and its affiliates.

Share.

Comments are closed.