Almost every month, news organizations talk about what the Federal Reserve is “targeting” in terms of interest rates.
How does this impact a small business that
purchases equipment regularly?
For a bank, the starting point for determining an interest rate is the “Cost of Funds.” Basically, this is their Inventory Cost or how much it costs them to purchase what they intend to sell. The largest banks can go straight to the source, and that source is the Federal Reserve. Smaller banks will need to buy from the bigger banks and pay a markup on the cost. Once they have the funds, they will add their overhead cost and the expected risk of the loans to determine the rate they offer the customer.
The Federal Reserve, or Central Bank, will move (you will hear it referred to as “Target”) the market rates by actively buying and selling securities to push rates up or down. Since this time last year, the Fed has been aggressively pushing the higher rate to curb inflation.
How Much Higher?
You can see from the chart here (click to view chart) that the 5-Year Treasury has gone from 1.74% to 4.26% at the time of this writing. The ‘Last’ or current rate will change and will likely differ when you get done reading this post!
Back to our question, how does this impact small businesses that must make regular purchases to stay competitive?
Over the last year, Transportation, Tow, and Construction companies have seen their cost to borrow increase by over 4%! A $100,000 loan for five years equates to an additional $194 per month.
For those that need to maintain the same loan length and own the equipment at the end of the term, the only silver lining we see in the market is the steady decrease in used equipment prices. For new equipment, we also see an increase in inventories and significantly fewer Dealer “Market Adjustments” on new equipment prices.
For those looking for alternatives, CFF will always have options available.
A Residual Lease will always offer a lower payment. An example of how this works is a 20% Residual Lease basically means that the Buyer is only financing (and planning to use) 80% of the equipment. Naturally, this will result in a lower payment, but the equipment is returned at the end of the term. Another alternative gaining a lot of traction with our customers in 2023 is longer terms on equipment. Traditionally, in equipment finance, the standard loan terms for older equipment are often 36-48 months.
Equipment Finance companies generally top out on new equipment at either 60 months or 72.
However, at CFF, we have structured finance products that will extend the terms much longer, with many loans being set up for 84 months or longer on quality equipment (regardless of New or Used).
If you are trying to decide how to navigate a higher interest rate environment to keep growing your business, reach out to a CFF Loan Professional today!
Contact our team!
About Commercial Fleet Financing, Inc.:
At Commercial Fleet Financing (CFF), our pros have given smart advice to fleet owners and owner-operators in the transportation, moving, towing or construction industries for more than two decades. With CFF, finding the right financing solutions is a phone call away and most borrowers secure commercial vehicle financing with ease. To talk directly with one of our finance pros and get started with credit approval in as little as two hours, CFF’s phone number is (469) 281-2962.