At the risk of being a bit basic, let’s understand what collateral is – it’s something of value that a borrower puts up to “secure” a loan. And if the borrower defaults, the lender can take and sell the collateral to help satisfy what is owed. 

So a loan with collateral is a “secured” loan, and one without collateral is considered “unsecured.” For example, most credit card lending is “unsecured”.

In many types of lending, the collateral is usually the item the loan is being used for. This is especially true in consumer lending. A car loan or a mortgage is typically secured by the car or home itself, and the lender will “repossess” them if the loan is defaulted on. 

Now, the better and more valuable the collateral, the better the loan terms and rate may be. This is partially why a new, high-end luxury car may have a lower rate than a used car and why a home/land will typically have a lower rate than most auto loans – the collateral is simply more valuable. 

In terms of equipment financing, there are two common collateral types: the equipment itself and what’s called a blanket lien. Let’s look at both:

• The Equipment Itself: Some lenders, Crest Capital amongst them, only require the financed equipment itself as collateral. This means if the loan is defaulted on, the lender can take possession of the equipment. The equipment will have a lien on it, which legally prevents the borrower from selling the equipment. Once the loan is satisfied, the lien is lifted. 

In general terms, “equipment-only” collateral loans are offered to profitable companies with good credit. This is because, in most cases, the equipment is usually worth less than the loan balance and carries repossession costs. So, the rate offered, while strong and competitive, will likely not be the absolute lowest.

• Blanket Liens: Blanket liens are when a lender puts a lien on an entire company, covering all assets. This is extremely secure for the lender, as a defaulting borrower can be liquidated until the entire is satisfied. But it’s a large drawback for the borrower, as every asset the company owns now has a lien on it. This greatly reduces financial flexibility – a company with a blanket lien cannot sell or even give away any asset without lender permission. Blanket liens are used by almost all banks, which is why banks often carry the lowest equipment financing rate.

Tradeoff Alert: Accepting an equipment financing loan with a blanket lien may result in the lowest rate by a point or two but will severely restrict a company’s financial flexibility and operations. If you are unsure about the ramifications of such a situation, ask your accountant.       

Collateral is a necessary part of lending – in short, most loans would not exist without some form of collateral. However, the types and amount of collateral can vary greatly and can definitely affect the rate you pay.

Not to pat myself on the back (ok, I am), but I was pretty darn prophetic. That’s exactly what happened. But hopefully, the cycle is coming to an end. We recently saw our first rate cut in what feels like forever – 50 basis points was the number.

But what does the rate cut mean for the economy? Does it mean inflation has been tamed and won’t come back? Does it mean the cost of borrowing will come down? Does it mean we’ll never see another rate hike?

The answer to all of those questions is impossible to nail down. And none of them will involve a speedy resolution. 

Inflation has proven sticky, and while rates of increase have slowed, the cumulative/compounding nature of this prolonged inflationary period means that price levels are now structurally and substantially higher than pre-2022 baselines. The reality is even in the best of times we have inflation. The cost of goods will still increase annually, just like they always have.

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.

Will there ever be another rate hike? History suggests it’s virtually certain. While the timing is unpredictable, our economic cycles have always involved periods of rising and falling interest rates. 

So what do these rate cuts mean for you? The immediate impact may be smaller than you hoped, but if you need equipment now or eyeing a great deal, go get it. Current lending rates are likely to be around for a while, and prices will still go up. Waiting always costs you.

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.

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!)

I wish I knew the answer, but I don’t. Nobody does. We’ve seen rates rise all year, most recently at the beginning of November. And to my eyes (as well as to most economic pundits), the end is not in sight.

Rates have been rising to combat inflation. But inflation remains stubbornly high, so the thought is the Federal Reserve is going to keep raising them until inflation is tamed. And unlike a scary movie franchise where everything thinks the villain has been vanquished, only to reappear stronger than ever, the Fed is unlikely to lower rates until they are absolutely sure inflation has been handled. No surprises, and no “Scary Economy Part IV, Inflation in Space!” 

What this means is even if inflation peaks, we should not expect rates to start falling immediately after hearing that news. It’s going to take time, and then the decreases will likely be very gradual. 

Ok, so what does that entail for all of us? It means this is the economy and rate environment we must work with. It also means that “waiting” out rate hikes is likely to be a futile, and possibly harmful, strategy. 

Companies cannot afford to sit idle for months and years. They need to replace equipment, they need to offer new services, and they have to keep pace with their competitors. One of the reasons inflation is high is demand is still exceeding supply. There is ample money being spent and commerce happening – in fact, many companies can’t keep up with demand. So now is not the time to turtle up. 

I promise you this: rates are going to come down – eventually. But again, it will be a while before it starts, and (in my opinion) the fall will be gradual. When will they reach late 2021 numbers? Goodness, that could take years. I mean, I hope it doesn’t, but I’m also pragmatic, and in my mind, everything is pointing to more increases.
I’ve mentioned this before, but getting in now and locking in a fixed rate on equipment financing could be a very savvy move a year from now, because we are nowhere near the peak yet.

Most economists felt this was inevitable, and I’ve been talking about this for a while now. Well, we’ve moved out of speculation and into reality – with the inflation numbers being what they are (the highest in 40 years), raising rates is the only real response the Federal Government has. 

But more telling are the comments by Federal Reserve Chairman Jerome Powell on Monday, 3/21/2022. In short, he laid the groundwork for multiple increases this year, and those increases may be larger than is typical.

Specifically, he stated “if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so.”

In quoting him, news outlet Reuters called it his “most muscular message to date”.* 

That’s fairly strong language, and should be taken as a very clear message to businesses everywhere. Rates will not only continue to rise, they will rise higher than we’ve become accustomed to. 

How long will this go on? If history is any indicator, we’re looking at more than a year. Maybe several years. Inflation doesn’t magically fall. It takes time. Lots of time. 

This means rates will rise, and rise again and again until supply and demand are more in synch, and inflation falls.

What This Means for Your Company

It means you are going to pay more to finance equipment tomorrow than you will today. And the longer you wait, the more you will pay. This will happen across the board: when the Fed rate goes up, the rate you pay goes up. Crest Capital, as well as every other lender in existence, is powerless to prevent this.

My advice? If you are going to need equipment in the next 18-24 months, get it now. 

Seriously, you will pay less now than you will in just a few months. It is very possible – actually, based on comments, it’s almost a certainty – that we’ll see four or five more rate increases this year. Some called it speculation a month ago, but the writing on the wall could not be any clearer. 

Lock in with a great rate now and shelter yourself from the inevitable increases. If you want to see what a current monthly payment looks like, use our quick and easy equipment financing monthly payment calculator.

_{*https://www.reuters.com/business/fed-must-move-expeditiously-if-needed-more-aggressively-powell-says-2022-03-21/}

It’s time for my annual “Fletch Predicts” post, where I’ll make a few predictions for the incoming year.

Like always, let’s start with sports:

Sigh… there was a time when I really nailed these. But I missed everything in 2018, and have to go back to mid-2017 to find my last winner. But I’m feeling good about these picks, so you folks headed to Vegas take note.

In football, we’re going with a New Orleans vs. San Diego Super Bowl. I know everyone was on the Rams and the Chiefs bandwagons all year, but they don’t have the defense to make the big game. And who wins the Super Bowl? I like Philip Rivers to get his ring, so go Chargers!

Next up are hockey and basketball, since their championships occur in the late spring / early summer.

Let’s go unconventional (and old-school) in basketball and say we trust in the process, and the Philadelphia 76’ers take home their first title since Dr. J and Moses Malone were there.

I have never hit a hockey pick, but I don’t feel bad about that, because it’s easily the hardest of the four major American sports to predict. We’ll go old school again and say the Boston Bruins win it all.

I love baseball. Some other sports do excitement better, but there’s nothing like a summer day at the ballpark. I picked the Yankees last year, and they got bumped in the playoffs. Let’s do it again – the Bronx Bombers win in 2019.

Onto the economy – there will be two rate hikes in 2019, with talk of a third that may or may not materialize. The economy will continue to chug along strongly, despite political upheaval that’s inevitable when the new Congress is sworn in. We’ll also hear whispers of a recession (like we are right now), but I believe that’s more because of the “can’t go anywhere but down” mentality than anything. Mark my words – 2019 will be a good year for businesses.

Last year, I talked about Bitcoin, but that seems to be over with for now. It’s been so rocky that nobody is going to trust it once it rises again. It may be the “future” (tech guys still insist the blockchain is the most secure way for monetary transactions to be handled), but it’s going to need time to become mainstream.

Construction surprised me a bit this past year, and I see that industry moving forward a bit more in 2019.  Health, tech, and energy all look good for 2019 as well. Sustainable / renewable energy could really surprise as more and more companies see fossil fuels as an “old” tech. And speaking of old/new, Artificial Intelligence (AI) makes big strides this year as an industry.

Section 179 doesn’t need a mention (oops), as it’s staying at a robust $1 million for 2019. So plan your purchases in advance, knowing it’ll be there for you.

Ok, there we go – Fletch Predicts for 2019. Hope your year has started off great!