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. 

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.

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! 

As I stated previously, almost all lending rates start out the same, and then are adjusted for risk. This is true with “the big three” of loans that many people get – credit cards, auto loans, and mortgage loans. And they all have different risks to lenders (with credit cards being the riskiest, to homes being the least risky). Let’s look at all three:

Credit Cards – Easily the biggest lending risk out there. This is because they are usually given out unsecured by any collateral. And add to that the things people buy with them have almost no resale value (TV’s, Blu-ray Players, dinner at the Golden Goose, etc.) So the credit card issuer is taking on a ton of risk, which means rates are really high (18-25% typically).

Cars and other vehicles – These are squarely in the middle of the “risk” table. To begin, there is often a down payment required, so the borrower has something in the deal. In addition, in most cases, the vehicle has a fairly robust resale value. Yes, it’s not going to recoup things 100% for the lender (after all, the vehicle is worth less the minute you drive off the lot), but while the loan is active, the thought is the vehicle could be repossessed and sold. So while the lender isn’t happy when they have to repossess (and you are even less happy when the repo man shows up), at the minimum, they are going to get something back. So auto loan rates reflect this “lessened” risk.

Homes – Historically, real estate typically goes up in value. Ok, perhaps that bubble burst in the last recession, but that’s an anomaly – a home and property can almost always be resold. Add in a down payment, and you have a situation where the lender has a much smaller risk. This is why mortgage rates are the lowest of these three loan types.

The above doesn’t include a borrower’s credit score (which matters) and down payment size (which will also matter), but those tend to vary from loan to loan. But barring that, the risk assumed is what makes these three types of loans so different from each other in terms of rates. So that’s why you are paying 20%APR for that prime rib.

In theory, with most commercial equipment lending, all rates start out the same, and then are adjusted appropriately based on risk. And the amount of risk a lending institution is willing to accept will correlate into the rates they offer. The less risk a lending institution accepts, the lower the rate they can give.

This is one reason why a bank will often have the lowest rates. Because historically, a bank is unwilling to accept risk. This is why they require account minimums, blanket liens, outside collateral (houses, etc.), and similar. An equipment financing company like mine might not require any of those things, but the rate, while still competitive, might be slightly higher.

Now, in and of itself, this is fine. But what tends to annoy us equipment financing people is that borrowers often only look at the rate, and not what else is factored into the deal. To give a quick example, if you borrow $75,000 from an equipment financing company, the equipment itself (plus your good name) might be all the collateral you need. The bank will require those things too, PLUS they will probably ask that you keep 50k in an account at all times (and that’s 50k you now can’t use – so you’re essentially borrowing from yourself.) Or, the bank may require the company principle to put up real estate as collateral. Or both – we’ve seen banks pretty much tie up everything you own because you wanted to finance a new machine. Plus, the bank will look at all factors every year and ask you to “requalify” for the loan. An equipment financing company won’t.

So yes, the rate is the visible price tag, but it’s far from the only factor involved. The smart borrower looks at everything, and weighs the true costs of any equipment lease or financing deal.