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

Another year is in the books. I like doing these posts as it’s fun to look back and see where I was right and wrong. My hit rate isn’t bad at all!

Let’s start with sports. I hit on the NBA last year, and we’ll see if I can do it again. But we’ll start with football.

No matter which team you follow, wouldn’t it be awesome to see a Detroit Lions Superbowl win? That’s my pick – Detroit vs Buffalo, with Detroit winning their first Superbowl.   

(note: I write these a bit in advance, so I hope both are still alive when you read this.)

Baseball… I picked the Braves last year. It seemed like a good pick, but they fell way short. But I am stubborn and am picking them again.

Basketball – let me make a bit of a dark horse pick here: the NY Knickerbockers! 

Hockey: The Carolina Hurricanes storm in and take the cup! That’s the way I see it.

For business, I see 2025 much like 2017. In the Donald’s first term, small businesses did well due to his favorable business policies. I see that happening again, and as a lender, I see lending and borrowing increasing as businesses look to grow. The S&P 500 seems pretty unstoppable as well, so I think 2025 should be a good year for most of us.

Rates will slowly come down as well. We will see a few cuts, but I would temper any expectations the Federal Funds rate will return to near-zero levels. I have my doubts we’ll ever see that again, and the low we hit next year (let’s say by autumn) may well be our “new normal.”

On the world stage, I am hoping to see a less volatile world and conflicts in Europe and the Middle East subsiding. That would help the economy as well.

Technology will continue advancing, with AI becoming an expected part of many of our devices and applications. 

I also feel, however, that we’ll start to see the beginnings of a shift, as AI makes a lot of white-collar work easier, with fewer people required. Where that leads, I don’t know – I can only predict this stuff, but I can definitely see the beginnings of a world with fewer jobs than people who want them. But we’ll figure it out – we always do, and almost all technology results in a net gain for society, and I feel AI will be no different.

Ok, there you have it – Fletch predicts for 2025. I hope you have a great New Year and that the days and weeks ahead shine bright.

The misconception is the lowest rate is everything. And it’s not even close to being everything. In fact, I would argue that in the amounts we generally finance (typically between $5,000 and $500,000), the rate is, at best, the fourth or fifth most important thing, behind collateral, several restrictions, and terms.

In fact, I know someone is quite knowledgeable about business when their first question is, “What are the collateral requirements?” or “How flexible is the repayment structure?”. People newer to business typically lead off with “What is the rate?”

Here’s a quick example: John and Mike both borrow $85,000 for a delivery truck. John’s rate is 7%. Mike’s is 8%. 

John’s 5-year payment is $1683.10.  Mike’s is $1723.49.

So on the surface, John’s payment is roughly $40 less per month, or $480 a year. Multiply that by five years, and that comes to $2400. 

Ok, it’s not chump change, but it’s not that big of a factor over five years, either.

But, in John’s loan, he had to put up his house as collateral, as well as having a lien on the truck. That’s why the rate was lower – lessened risk to the lender.

In Mike’s delivery truck loan (written by Crest Capital of course), the truck lien itself was the only collateral. 

John risked his home for $2400 over five years. Did he really get a better deal? 

I don’t think he did. Most people (and any spouses/family members also living in that house) would agree. 

As I go through this entire series, we’ll run into a number of these “tradeoffs”. I’ll highlight them with a Tradeoff Alert. 

As this upcoming series will show, there’s a lot that goes into a rate, and there are tradeoffs. And when it comes to small business borrowing, the lowest rate is usually not the best deal.

Hey Fletch, I know you always tout getting equipment when you need it but aren’t rates coming down soon? Wouldn’t it be better to wait? Dave P.

Hi Dave,

Honestly, assuming the equipment will earn you revenue, no, it is not better to wait. There are three reasons for this. The first is, as I recently posted, Lending rates are not a one-to-one correlation with Federal Funds Rate movement. Lending rates will stay steady for some time before they follow suit and slowly lower. You may be waiting for quite some time.

The second reason is inflation is still here. Annual price hikes are common in many industries. Waiting, especially at this time of year, almost always ensures you will pay more. 

Lastly, it’s like I mentioned earlier – getting equipment when you need it earns revenue. Don’t miss out on that. 

I hope this helps.

Fletch

Hi Fletch, I am selling a dump truck and the second I sell it I want to buy a larger one. I have it all picked out and am ready. What are the chances you can handle the financing for the sale and the financing for my new dump truck at the same time? Mark

Hi Mark,

That’s a great question. Of course, it would depend on your buyer’s details. But assuming they qualify for financing and everything checks out across both deals, we can work with everyone so there’s little to no gap between the transactions. Let us know and we’ll get to work.

Fletch

Hey Fletch, You picked the Braves to win the world series but they got bounced in the first round. What’s up with that? Pete M.

Pete,

There’s a reason I don’t make my living as a gambler! But I did hit with the Celtics, right? I usually hit at least one a year, so there’s that.

I did want Atlanta to win. But they didn’t. And of course, there’s no crying in Baseball…

Fletch

First, not to pat myself on the back regarding my prediction skills, but I did say back in Feb 2023 that rates would continue to rise for a bit (they did) and then hold fast for a long time (they are). 

Now with every Federal Reserve meeting, the question is “when will cuts start?” 

Nobody knows the real answer, but I’ll say “not for a while yet”. Some optimists were saying we’d have 4-6 cuts this year. That was never going to happen, but now it’s starting to look like we may get one to two at best. And none is a definite possibility.

So why is that? Inflation is proving stubborn, especially the so-called “last mile” to the target of 2% (which may not be realistic). But the second part is, at least on a reported Macro level, the economy seems to be humming along. 

Honestly, I’m not so sure the picture is as rosy as we’re being told it is. To give one example, job numbers have a way of not telling the real story (e.g., people fall off unemployment rolls and are not counted anymore, but still don’t have a job.)  Also, someone with two part-time jobs would usually prefer one full-time job, but the numbers don’t reflect that.

This is all my way of saying: THIS is the environment we have right now, and it’s the one we have to work with. I’ve talked recently about equipment financing and growth and not waiting around for the “economic ok” from the news. Because you’re not going to get the real story.

If your company is doing well, keep doing what is working. In fact, do more of it. Add another crew. Offer more of that service everyone wants. Make the building better. Etc. That’s how you expand when things are going well.

If you are on the other side, and things were better a year or three ago, you should consider changing things up. Offer another / different service. Maybe try serving a different geographic area. Do something. Because things won’t get better on their own. 

The current business environment is what we have, and it will be here for a while. Make it work.

There are several reasons for this, chief amongst them is the construction industry is always on the move. When buildings go up, you need heavy equipment. When buildings come down, you need heavy equipment. When roads need to be built, you need heavy equipment. When land needs to be cleared, you need heavy equipment. When debris, goods, or even concrete needs to be moved, scooped, hauled, and/or delivered, you need heavy equipment. 

Basically, you need heavy equipment for any kind of heavy work. So there’s always a need.

Second, heavy equipment almost always produces immediate revenue, and it keeps producing it. If you finance new furniture or fixtures, the monetary payoff might be measured in years. But a new backhoe? That can go in the field tomorrow and earn substantial revenue right away. 

So there’s the revenue impact that is both immediate and substantial.

But there’s another reason: construction equipment tends to age well and holds value long after your equipment loan is paid off. 

I have a neighbor who is in his 70’s. He’s (sort of) retired from owning a construction business, but he still keeps his 15-year-old backhoe around. He uses it to help neighbors, and occasionally will hire himself out for a day when he feels like it. But also important to him is the fact that he could sell it tomorrow for “a pretty penny” as he puts it.  He always has some budding construction entrepreneur asking about it. I suspect he’ll never sell it, but for him just knowing it’s wanted has meaning. 

This is important for any company. Sure, things like backhoes and other heavy equipment depreciate, but there is only so low it will go. The used heavy equipment market is quite robust. And this used heavy equipment typically comes from more established companies upgrading. So for them, owning something that keeps solid value never hurts.  

There’s almost no downside to financing construction equipment. Get it in the field to earn revenue right away, and let it bring you that “pretty penny” years down the road.

I’ve been on a pretty good roll – AI was the buzzword for 2023 just like I thought it would be, and I hit on one sports pick too. And rates pretty much did what I predicted as well. Now onto 2024. 

Sports first: for football, let’s go with a rematch of a super bowl of my youth: San Francisco 49ers vs. the Miami Dolphins. It’s not Dan Marino vs Joe Montana this time, but it should be fun. And in a reversal of last time, a Miami win!

*Note that I do write these a little ahead of time, so I hope both are still alive when this publishes!

In Baseball, I picked the Braves last year, and they rewarded me with a great regular season that crashed and burned in the playoffs. But not this year – this year our locals take it! For an American league finalist, let’s go with the Baltimore Orioles to take the next step and make the world series.   

Basketball… I hit with Denver last year, but this year I am going old school Celtics. They’ll beat Denver (who makes it to the finals again.) 

Hockey – the hardest to predict. The NY Rangers look mighty strong though, so that’s my pick. Let’s go with them vs the Vancouver Canucks in another old-time rematch.

Ok, onto economics: Rates are going to start to come down in 2024. How many rate cuts remain to be seen. The Federal reserve has said perhaps three, but I’m going to put a little caution there and say two. Last spring and mid-autumn.

I also expect the US economy to be fairly stable, assuming world events don’t get out of hand. I also think our presidential election in November to take a week to resolve. That seems to be the way moving forward. Hopefully you’re happy with the result! 

Ok, enough politics – onto more fun stuff. AI is going to continue to dominate, as it changes everything. We’re already seeing this in search engine results. I do expect a little pushback though as we become increasingly uncomfortable with certain aspects of it. For example, I just saw a new AI technology from NVidia that makes it so your eyes are always looking at the camera during a video call. Yea, neat… but also not real. So are we ok with what we are seeing not being real? It’s a weird area for sure. But I do expect the “fun and useful” parts of AI to be more prevalent than the creepy ones. 

We’ll also start to see AI combined with robotics, which will reshape entire industries. I was talking with a friend who paints houses, and he mentioned how hard steep roofs can make painting.  Then he said “I can’t wait to buy an AI controlled drone to do it”. It doesn’t exist yet, but he expects it to come. Maybe not this year, but we’ll start seeing things like that more and more.    

I’m pretty optimistic about 2024, and I hope you are too. If you look at how things truly are, and not how they are portrayed on social media, there’s a LOT to like. 

Bye 2023 – it was real. Hello 2024. Let’s do this.

Fletch,

I’ve been reading your thoughts about rates but I’ve been holding off getting new gear because I was too scared to borrow when rates were rising. I clearly should have a year ago but that’s hindsight. But today even though I really need some new machinery I’m still hesitant to commit to a long-term loan because rates could start falling. A friend of mine suggested I lease but I’m hesitant there too. Can you talk me into it?

First of all, smart move in asking The Lease Guy to talk to you about a Lease!

But yes I do understand your dilemma and it’s not uncommon. For people who have held off buying equipment the past year, they are almost to the point where they feel like they must stay the course.  

I will say I don’t think rates are going to lower, so you’re probably safe in just financing what you need. But you asked me to talk you into a lease, so here goes:

Get an FMV Lease, which stands for “Fair Market Value” lease. Take it out for 24 to 36 months. This means you aren’t locked in as long as a traditional loan, but most importantly, it gets you the equipment you need right now. And at the end of the lease, you have the option to buy the equipment at the fair market value. If rates are lower and you like what you have, go ahead and buy it. If neither of those things are true, hey, lease another. 

Now, because an FMV lease might be an operating lease, it could be structured so it isn’t on your books as an asset, meaning you can’t take a Section 179 Deduction on it. However, as it IS an operating expense, you can deduct the lease payments on your taxes. While it’s not as big as Section 179, it’s still pretty attractive.

Plus, with the FMV lease, you’re really only paying for the portion of the equipment’s life you are using, which means your payments are going to be pretty manageable.

Lastly, whatever your feelings are, it’s never a good idea to “need” new machinery or equipment, but not get it. It’s hard to competitively operate that way. So if the lease gets you the equipment now, and you feel good about the financials, there’s almost no downside.

Hope that helps! 

Whew… that was some ride 2022 took us on. Between the Fed going wild on rate hikes to whispers of possible recession to fuel prices to Fletch finally hitting again on a sports prediction, 2022 was quite interesting.

2023 promises to be pretty unique, so let’s get to it with another year of Fletch Predicts, starting like I always do with sports.

Like I said, I got back into the “Win” column with basketball (Warriors), and my Hockey pick (Tampa Bay) made the finals, so I’m on a sort-of hot streak.

Football: I have to go with the Bills. How can you not? Especially if the playoffs go through Buffalo and their January weather.  

Basketball: I hit with the Warriors last year, but will go another way this year. If they don’t implode, I like the Brooklyn Nets to win it. It’s not fair to pick a second team and have it count, but if it did the Denver Nuggets are a dark horse. 

Hockey: Always hard to predict. I’m going old school this year with the Boston Bruins. 

Baseball: I picked the Mets two years in a row, but I am dropping them even though they spent a zillion dollars on players. I’m staying local this year – Atlanta Braves! 

Now let’s talk about business and the economy. 

2022 saw rate hike after rate hike, including an unprecedented four consecutive 75 basis point increases. 

I have good news and bad news here. The bad news is rates are very likely to keep rising well into 2023, maybe for the entire year. The good news is the increases will not be as large. 

The Federal Reserve has been raising rates to address inflation, which remains stubborn. And they will not lower them until they are 100% sure inflation is vanquished. So even when inflation peaks (maybe late this year, maybe 2024?), rates will stay higher until some time passes. 

My prediction is if you are financing equipment, any 2023 rate will probably be a rate you want to lock in, as it won’t be going lower anytime soon (and could still go up). 

More business predictions: AI… We’re hearing a lot about AI. AI will be increasingly used in business, and coupled with Big Data, it will drive many business decisions. I don’t think we’re ready to throw our artwork and such to AI, but AI is very viable for things like target markets and such.

Supply chains have loosened up for some goods, but remain frustrating in others. I can feel a changing of blame in certain industries though, and that’s my prediction. For awhile it was fair to blame Covid, but for some companies, the “Lean” aspect of operations is what’s causing a hiccup in the delivery of expected products and services. And consumers/buyers are noticing. The late December Southwest Airlines fiasco is the tip of the iceberg here. Don’t let that be you.   

This also represents opportunity – if your competitor is faltering because they don’t have enough delivery trucks or workers or machines or whatever, that’s an opening you may not have had in years’ past. Can you step in? (Hint: fast financing can help.) 

For most industries, 2023 should be fairly stable, even with whispers of recession (which if it happens, I feel will be mild and short). But I also feel the previously mentioned “lean” aspect will loom larger as a narrative. It might even spawn a catchphrase or two.  

Oh, one last thing: we’re going to hear about Twitter ALL-YEAR-LONG. I do not know if that’s good or bad. 

And there you have it – some predictions for 2023. Let’s continue my hot streak – Go Bills! 

First and foremost, I’d like to see interest rates stabilize. That would be my main wish for 2023. It’s not going to come true of course, but it doesn’t mean I can’t ask for it. The reality is rates will probably keep rising for a few more cycles. How much is unknown, so maybe “not seeing as many ‘big’ increases in a row” could be a more reasonable wish. THAT one has a shot at coming true. 

Second, I would like to see the supply chain loosen up a little more. We’re still seeing supply chain issues, and while there are industries that are close to returning to normal, there are others where items simply cannot be had. Plus, the computer chip shortage is still a major thing, and it’s affecting many industries, as well as keeping a PlayStation 5 out of my wanting hands.

I’ll stick with economics as a third wish, as it really dominates all industries right now. I wish for less government spending, as that’s not helping inflation at all. It seems like rate hikes could eventually push us into a small recession, and I’d like to see all possible efforts to avoid that utilized. That means reigning in govt spending. I’m not going to get into sides here or political details as that’s pointless – just cut spending please. Thank you. 

One last wish on a personal/professional level: I want more companies to look at offering equipment financing. Because it’s easily the single best sales boost any equipment seller/vendor can deploy. And it’s not only free; it’s ridiculously easy and straightforward too. If a company is not offering financing, I guarantee doing such will instantly make 2023 better than 2022 was.  

Ok there you have it – my wish list for 2022. Almost all economic, but hey, that’s where we are today. I’ll deal with it by cranking up some Jimi on Christmas morning (I hope!)