The first is rates. I’m not a fortune teller, but I have been pretty spot-on with my rate predictions over the past three years. And currently, we seem to be at a crossroads. After a year-plus of large hikes, then a few rounds of small cuts, things have leveled off. The truth is, we’re not likely to see any more cuts for the foreseeable future. In fact, depending on how things shake out the next few months, we could even see another hike before we see another cut. 

Basically, what I am saying is today’s rate is likely going to be your rate for quite some time. And with a fairly uncertain world economy right now, locking in a fixed rate on something you need is a smart thing to do.

Second reason: Used equipment inventories are bursting at the seams. Every single pre-owned equipment dealer and auction house we talk to has seen their used equipment inventories swell over the last few quarters, and they are looking to pare down. There are several economic reasons for this that go all the way back to the pandemic and supply chains, but the fact is right now, the glut of used equipment available is unsustainable for dealers. 

What this means for business owners is there are some fantastic deals on all manner of used equipment – used vehicles and used machinery in particular.  If you have a need for something, definitely consider a used model – you will likely be pleasantly surprised at the value you can get. And yes, you can finance used equipment and lock in a great rate right now. 

I always say it’s a good time to finance equipment (because it is), but right now, Q1 2025, things are especially attractive, and business owners should take advantage.   

I say that because in this series of “how do lenders arrive at interest rates?”, I’ve talked about different factors that affect the rate you pay.

But where does that rate originate? It doesn’t start at zero (after all, money is never free).  

In general terms, most lenders will utilize existing benchmark rates as a starting point. Then those benchmark rates get adjusted upwards using all of the factors I’ve discussed in previous posts (e.g., equipment type, collateral, credit scores, market conditions, etc.) In other words, a starting point using a benchmark rate is established, then your loan parameters go down a conveyor belt (so to say) comprised of all the other factors I’ve posted about, each one possibly affecting the final rate you pay. 

So what are these benchmark rates? Let’s take a quick look:

The Federal Funds Rate: This is the most common benchmark rate, and many lenders use this as a starting point for short (24-60 month) loans. This is the rate banks charge each other for overnight lending (which is assumed to have the least amount of risk). The Federal Funds rate is the one most people know about, because that’s generally the rate that’s talked about when the news says “The Federal Reserve raised/lowered rates 25 basis points”.

ICE Swap Rate: This is the rate where banks will swap interest rate payments. It’s a useful tool to help banks manage risk and volatility. For example, Bank A may have excessive variable rate loans, while Bank B has an abundance of fixed rate. Both would be better off with a more balanced spread, so they swap interest payments on some of them. The Ice Swap Rate is the premium they pay for this swap. There are different ICE Swap rates for different time periods, and for consumer lending purposes, the longer ICE Swap terms are typically used as a benchmark for longer-term loans.  

SOFR (Secured Overnight Financing Rate): This one is increasingly used for variable-rate loans. This is the overnight lending rate using US Treasuries as collateral. It is calculated daily by the Federal Reserve, so it’s always current and relevant to the economy, and since it utilizes treasuries, it’s considered quite stable. When rates are going to change in a loan, SOFR makes for a good starting point.

Treasury Yields: Long-term loans can be tricky. Since predicting the future is hard, we can’t know what economic conditions will be in a decade or more. But our best guess can come from what the US Government is comfortable with on treasuries.  So, Treasury Yields may be used as a baseline for longer-term loans.  

There are lenders that may use other benchmarks, but in general terms, these four should cover most loans and terms. 

Now, it’s very important to remember that these are only baseline rates.  They will always go up based on risk. And while most of us like to think we personally are good credit risks, the truth is, risk-free lending is impossible. So the baseline rate is always going to go through the gauntlet I’ve previously written about. Even lending to billionaires carries some risk. Trust me, Bill Gates himself would pay higher than the federal funds rate if he borrowed money.

I hope this post gives you at least a basic insight as to where rates begin. If you’re interested in seeing some of these rates, here are a few links:

Federal Funds and SOFR

ICE swap rate (requires a license subscription)

Treasury rates are available at the treasury website

In plain terms, most lenders want to know what you are going to do with the money they lend you. This is true for consumer loans (your personal loans and credit cards – which have no defined use – are going to cost more interest-wise), and it’s especially true with business lending.

The reason it’s especially true in business lending is the intended use of the loan is often related to a borrower’s ability to repay the loan in the first place. Putting an equipment financing slant on it, let’s say a company is borrowing money to finance heavy equipment. The lender (Crest Capital of course) knows the company is going to use this heavy equipment to earn more revenue. All else being equal, that’s much preferable to a lender than needing money for an undisclosed reason.

In addition, if the loan’s purpose is fully disclosed, the lender has an idea of the collateral involved. A good example is a piece of machinery that has a strong preowned market – since the machinery will be used as part of the collateral in almost all cases, the lender knows they can recoup some of their money if things go bad. This will usually result in a better rate.

This is very easy to see on the consumer end as well – this is why loans for things like a house have a lower rate than a car, which has a lower rate than a personal loan or a credit card. The house can be foreclosed on, and the car can be repossessed. But those concert tickets and dinner that night that were paid for by a credit card cannot be recovered. Hence the higher rate. 

Makes sense, right?  In fact, it’s time for our first tradeoff alert:

Tradeoff Alert: All else being equal, funds for specifics with resale value will usually result in a better rate.

Loan term will also matter. In general terms, the faster a lender gets their money back, the lower the rate they are willing to offer. This is why a 36-month term will typically have a lower rate than a 60-month term for the same item. This can sometimes vary when lenders or vendors run specials, but in most cases, shorter terms result in a lower rate.

So there you have it – loan type / intended use / loan term… they will all factor into the rate you pay. 

Will borrowing costs come down? Not as fast as everyone would like. While lenders’ rates typically follow the Federal Funds Rate directionally, the relationship isn’t as straightforward as many might expect. Lenders adjust more slowly, cautiously, and incrementally than the Fed. A 50 basis point Fed rate cut doesn’t mean an immediate equal reduction in lending rates. With the higher default rates across lending sectors in 2024, lenders will likely reduce rates more slowly than Fed cuts as they weigh multiple factors beyond the Fed’s actions. Borrowers shouldn’t expect quick or one-to-one reductions in lending rates following Fed cuts.

I wrote it because there was a misconception that once the Federal Funds rate was lowered that all lending rates would follow on day one. And, as my passage above indicate, they don’t.

But it occurred to me that most people simply take rates on a surface level. That they really don’t know what goes into a lender’s interest rate on any particular loan or lease. So I thought it might be fun to do a little series on interest rates, so you can get a really good idea of how a lender arrives at the rate borrowers pay.

Here are a few sneak peeks of future topics and posts:

• The relationship between risk and the rate
• How loan type and intended use affects rates
• Collateral and rates
• Internal cost of funds and rates (aka, “how much does money cost?”)
• Defaults and rates
• Credit scores and other risk profiles affecting rates
• Benchmark rates and market conditions
• And more!

My goal is to give you a look under the hood at how lenders generally arrive at the rates borrowers pay. There is definitely more to it than meets the eye. I personally find this topic fascinating, and I hope over the posts to come, you will too. 

The implication is that there really is no better time than right now, unless we have a time machine. Which we (sadly) don’t.

The same goes for acquiring equipment for your company – there is almost no better time than when you need it. Forget market conditions, and forget trying to time things economically. If you need it and can afford it, get it. Because you can’t grow without it.

And it’s not just growth. You also need to keep pace with your competition. Imagine your main competitor showing up to jobs with much better gear than you have. Or sending out a better product, faster. Or handling customers more efficiently. These instances can only go on so long before they make a serious impact.  

Over the years, I have seen hundreds of small businesses try and “time” things, waiting for economic conditions to be perfect, before taking the plunge on an equipment investment. In almost every case, they left serious dollars on the table. The impact of new equipment, and the revenue and profits it could have produced, far exceeded whatever they saved by waiting for market conditions to be just so.

By all measures, we have a good economy right now, but there’s also a lot of uncertainty that causes companies to sometimes pause. However, I feel that this uncertainty will be static moving forward – our deeply embedded 24/7 news cycle guarantees that. News needs clicks, and clicks come from constant new content. And the most popular/clickable content is typically the inverse of what’s happening. “Storm clouds ahead” gets more play than “hey look, another nice day coming up”.  

But right now, the day is indeed nice. And new (or new to you) equipment can make it even nicer. 

As you well know, over the last 18 months, the Federal Reserve has been steadily raising rates. This year they paused in June, raised them 25 basis points in July, and paused again in September. But their September comments were somewhat hawkish, as they alluded to how stubborn inflation is, and the need to stay higher for longer.

The next meeting is in November… and what can we expect? Well, unless economic data changes (and it could – more on this in a second), most experts predict another 25 basis point increase. 

The good news here is that those same experts predict that is likely to be it. And that maybe some cuts could happen at some point in 2024. Now we can’t get too excited about that, because even if cuts do come, they will almost certainly come sloooowly, likely 25 basis points at a time. So the rate we’re seeing right now is likely to be very close to the rate we’ll be seeing in a year. 

**Key takeaway for that = don’t let rate expectations drive your near future decisions. You’re not going to miss out on a significant rate drop.    

Now, I did say “unless economic data changes”, and this is where I’ll make a prediction – we will see economic data in the near future that shows the previous rate cuts are (finally) working. 

This is gut feeling, but I’ll bet you share my feeling: all the data I’m reading says the economy is strong and things are just swell… but does it feel that way to you? I’m seeing a lot of spending by older folks for sure, but younger people? Not so much. And I feel this will be reflected in future data. 

Does that mean a November pause as well? I sincerely hope so. As a B2B lender, I hear small businesses loud and clear: they want lower rates, and they want them now. I just hope the Federal Reserve is listening. 

So that’s my optimistic outlook – hopefully a November pause, but if there is an increase, it’ll be 25 basis points. Then a long period of nothing. Then maybe, just maybe, we start to see some small cuts later next year. 

Stay the course folks.

Of course the big news was the failure of two Silicon Valley banks. Although looking at the reasoning and details, this is far from a crisis, and more of an unfortunate circumstance (overly simple explanation = rising rates made the bank’s safe investments not worth as much short term).

But for me, the more noteworthy part was what happened in March’s Federal Reserve meeting. The Fed ended up raising rates again. Of course, it was a small increase (25 basis points), but it signaled some interesting thoughts if you’re into reading the economic tea leaves: banks in general are just fine, and they are NOT going to back off trying to tame inflation.

Think about this – the two bank failures were at least partially attributed to rising rates. And the Fed’s response was akin to “yea, it’s unfortunate for these two, but it happens. Now, about inflation….”    

In other words, the Fed obviously feels it was a perfect storm of particular investments and widespread withdrawals that contributed to these failures, and it’s more an anomaly than a trend. 

The second thing is, even with the talk of “maybe they should back off” the fed essentially said “nope, taming inflation is too important” (I am embellishing and paraphrasing of course. Nobody said these things. But the actions make this conclusion a pretty logical one.) 

I’ve been saying for a year now that rates aren’t going to return to previous 2021 lows for a long time, and this cements my belief further. I do feel we might be getting close to peak rates, but I don’t see cuts for quite some time.

Now that I’ve done rates to death, let me discuss one other thing – the talk of a possible recession…. 

I don’t know about you, but I’ve been hearing this for an entire year now. I’m beginning to think this is going to be a perpetual thought in our 24/7 social-media-driven news cycle, and people say it just to say it. As I’ve alluded to in a few recent posts, demand is still here, people still want goods and services, and the jobs outlook continues to be strong – there are more jobs than workers to fill them. I think we’re going to level off nicely, without a recession. 

So in the end, my outlook is considerably brighter than the news. Maybe you should come here more often!   

Many predicted these hikes, and if comments by pundits and economists are to be believed, rate hikes will continue for the foreseeable future. 

That said, rising interest rates are not all doom and gloom. In fact, savvy companies can make it work for them. And that’s because, all else being equal, the Fed raising rates works both ways. Yes, you pay more for the money you borrow, but you also generally earn more on your money in the bank. 

Note: I do realize the “value of a dollar” factors into things in a big-picture sense, but this would be true regardless of where your money is, so I prefer to focus on raw numbers – the number you pay out, and the one you get paid. 

This can work well for you in several ways, and honestly, it mixes quite well with equipment financing.

Locking in fixed-rate equipment financing now (while keeping your own money in the bank) can work out well when rates go up. Not only are you already locked in at a lower rate on your payment, but the money you kept in the bank is now earning more. This could be substantial as the dollar figures (and rates) rise, but at any level, paying a lower rate out while earning a higher rate in has no downside.

This also works very well with Section 179. If you take a full deduction, the money from the tax savings stays in your bank account. As rates rise, just by sitting there, that money works harder in a raw numbers sense. I realize some companies may still like to depreciate annually, but in a “rising rates” climate, many will feel it’s more advantageous to take it all in one lump sum and let those higher rates do their thing.  

Rates going up are not smiled upon by businesses, but they are an unavoidable fact of life right now. And with a little planning, you can definitely make this work better for you. 

Lock in low, keep your own money in places that get higher rates, take deductions, add the deduction money saved to the “keep” pile, and keep reading The Lease Guy! 

Let’s talk about rates and equipment financing for a minute, and trying to get the best deal you can for yourself.

Rates on any type of lending are affected by the Federal Reserve Rate (aka, “the Fed”). If that goes up, banks and other lenders raise their rates. When the Fed goes down, lending rates lower. The actual mechanics are a little more involved than that, but this isn’t economics class, and while the algorithms and such can be complex, the universal “Fed Down, lending rates down / Fed Up, lending rates up” holds true (this also works in reverse on investment interest, but that’s for another industry!)

Well, here in the middle of my “what month is good to finance equipment?” series, I’m going to say right now is a very good time, because there are indications that rates are going to tick upward soon. Let me explain:

During the 2008 financial crisis, the Fed rate dropped to zero, to help spur borrowing and economic activity. And it’s essentially sat there for almost a decade. But late last year, something happened… the Fed raised their rate to 0.50%. Then in March it was raised to 0.75%. Yea, I knew I saw a few extra pennies in my savings account.

The Fed has made noises that there will be another rate increase later this year. It’s not guaranteed, but most people in the know think it’s likely. So what happens is, banks and other lenders will start to creep their rates higher in anticipation.

That means right now is a great time to finance equipment (lease it too). The rates are still low, and equipment financing is the best bargain around, especially if your equipment lender utilizes fixed rates. This means you can lock in a great rate right now, and then smile knowingly when rates go up, because you’re unaffected. I mean, really, why pay extra money by waiting, especially if you need the equipment now?

Listen, you know Fletch is good at this prediction thing. And I say rates will go up again this year. So in the words of the immortal Ron Popeil (you know – the pocket fisherman and hair in a can) “operators are standing by – call now!”