Climbing Rates, Climbing Costs: Navigating Equipment Financing in a High-Interest Era

With interest rates on the rise, the climbing cost of equipment is a new challenge for many business owners.

Taking an honest look at your business’s revenue and equipment costs is crucial to making the best decision.

Transcript

Welcome back to another episode of the Smarter Equipment Finance podcast. I'm Rob Misheloff. I'm Chet Zeken. And today, we're gonna talk about high interest rates and what the high interest rate environment may mean for you and your business.

Mhmm.

And when I think of rates, you know, there's there's a little bit of sticker shock.

It's kinda like Yeah.

Lately, I you you know, if my family goes to a Mexican restaurant. The bill's a hundred dollars.

Easy. So you're not even drinking.

Yeah. No. No.

It that's for chicken and tortillas Right.

And some sour cream.

Yeah.

And it kinda makes you all mad, but I'm still gonna go out to eat.

Of course.

And and that's true, you know, of of a lot of different things. I do hear sometimes people say that they're going to wait to borrow money until the interest rates recede a little bit. But Mhmm. The truth is, just like I'm not gonna wait till next year to eat, I'm probably not gonna wait till next year to take advantage of a good business opportunity. Right?

Yeah. Absolutely. I think that that's, that's an important decision that any business owner needs to make. And, you know, we, you know, similar situation in my personal life.

Yeah. There's definitely been some things over the last couple years that have just, the prices just gone through the roof. I'm like, that's not necessary. But we're talking about, you know, you know, what would be like a luxury item.

Right? Something I Sure. Something I wanna buy or something I've wanted. But, you know, when it comes to the usual day to day expenses, yeah, I'm gonna eat.

I'm gonna buy gas.

You know, my, you know, electricity and water bills have also gone through the roof. I'm still gonna pay them. I'm still gonna need to get water and gas. I'm not gonna put that off.

And when it comes to our business, right, yeah, things are costing more.

But this is also a time when a lot of other businesses are doing, like, what you're saying. They're they're hanging tight. They're not really looking at the opportunity for what it's worth.

Right. And when there's an opportunity, to expand your business, of course, you wanna keep cost in mind.

But it shouldn't be the only thing that's on your mind when you're making a decision. If you can make, you know, ten, twenty, or thousand dollars a month by adding a piece of equipment, it might cost you a little bit more on the financing. It might cost you a little bit more to get the equipment, but it's definitely worth taking a look at. And that's that's what we're here to discuss today. You know?

Yeah. Yeah. And so let's talk a little bit first, let let's talk about why interest rates are rising. Right? You know, the Fed's trying to clamp down on inflation so we don't become the next Venezuela or Zimbabwe.

So it it's it's kinda necessary.

What are your thoughts on that?

They're they're just trying to slow us down. They're trying to slow down growth. Right. Right?

And, and that's fine for the masses. But but I'm not making a decision for the masses when we talk about an opportunity. We're making a a decision based on, you know, current economic climate and an opportunity that can benefit our team. Right.

Right? And take us to the next level. Right?

I'm not one to let the government step in and tell tell us when it's a good time to buy. Right. Right? Of course, it has to be a decision, but and and that's a a factor in making a decision.

But but when it comes to the, you know, the government raising rates and whatnot, yeah, it's it's it has an impact. It impacts us.

Our lenders, you know, our underwriters need to charge a little bit more in order to make sure that they stay safe and that they're able to continue to lend.

You know, and if you're a a customer that's making a purchase during a time like this, you know, it's is it gonna cost more? Yeah. But what's the what's the opportunity cost that you're missing on?

It may be the end. Like, Wall Street thinks it it this is gonna be the end of tightening, and we're gonna see rates come back a little bit this year. But number one, who knows? Mhmm. Number two, so rates come in seventy five basis points.

Who cares?

That's not gonna have an enormous impact No. On your payment. If you're buying a truck, it might have a small impact.

No. If you're buying a house or something like that, that that's definitely a a big impact. But on a piece of equipment, yeah, it's, a when you're financing over a short period of time, the impact is a lot less. Yeah.

Right? So, yeah, when when the interest rates rise, you know, a lot of people decide to not buy a house because you're paying on the house for thirty years, man. Right. Right?

In a situation like this, it's it's it's much less impactful.

You had, we talked about kind of like a house purchase. You kinda gave me some numbers roughly of, like, what that cost in the past and and what it would cost now. What were those numbers again?

If you would have bought, say, a a five hundred thousand dollar house in two thousand or two thousand one Mhmm.

Before your your insurance and your property taxes, because that that that varies by area.

But just just the the mortgage payment, assuming a thirty year fixed, on a five hundred k house would have been two thousand dollars back, you know, three or four years ago. Yep. Today, that same mortgage is going to cost you, sixty percent more. It's gonna be about thirty three hundred dollars a month. Mhmm. And in that in a case like that, absolutely.

The difference in interest rates, can make the difference between whether you can or cannot afford to buy a five hundred k home, and you might decide Right.

Either why I want a two hundred k home, although good luck getting one of those today.

Yeah.

Or you might say, well, I'm I'm gonna have to continue being being a renter for a while Yeah.

Because I can't get qualified for a mortgage or it just doesn't make financial sense.

Well, you know, with a house, right, you're you're purchasing a house and that's an investment. Right? You it's only costing you money until you sell it. Right. Right?

So when you're looking at paying a payment that's sixty percent more, yeah. That's absolutely should impact your your decision. Should it you know, should you not buy a house? No.

I'm not saying that, but it definitely is something that you've gotta keep you've gotta take that into consideration. Right? Kinda, you're probably only gonna make you know, it's a thirty year fix. You're probably gonna do that for a few years and then rates come back down and you refinance.

But even if it's only three years, you're talking an forty thousand dollars you just spent in three years on that home because the the payment increased. Right. And you're not getting that money back. Right?

You're not you're, you're just making a payment. You get to live there. Right.

When I when I compare that to a decision of making a purchase to, you know, buy equipment, buying equipment's not simply, you know, investment in the business. It's an investment that, you know, usually turns a decent amount of profit. Right.

It helps the business grow. Well, not only that. What what we're seeing, if you take the difference in payments, say, if you're buying a excavator or a dump truck and you're buying it three years ago. Now let let's let's just use a NA credit example. Mhmm.

A fifty thousand dollar purchase. You're probably three to four years ago looking at thousand fifty a month or so, give or take.

Yeah. Give or take. Yeah.

Today, that same same purchase because of the higher interest rates, then maybe it's eleven fifty or or twelve hundred dollars.

You're talking about Right.

Hundred, hundred and and fifty dollars a month.

Now from talking to customers, literally thousands thousands of them over the years Mhmm.

More often than not, when somebody comes to us and wants to purchase a fifty thousand dollar piece of equipment, they're intending to put that equipment to work and bring in revenues of anywhere between fifteen and twenty thousand dollars a month Mhmm. With, expected, net income from that particular piece of equipment of usually ten, eleven thousand dollars a month.

Yeah. Significantly more.

We're usually looking at, you know, seven to ten x businesses make on return Yeah.

Compared to the payment.

Compared to the cost of the equipment, you know, on on the monthly payment. Yeah. Absolutely.

Yeah. Absolutely. So the fact is in in a case like that, the interest rates don't matter really at all.

No. Not really. Yeah. I mean, it it matters in the sense that you're making that payment, and it's gonna cost you a little bit extra. But, you know, I look at the cost of not doing that business as well. Right? If I'm gonna save if I'm gonna make ten thousand dollars a month with a piece of equipment, and it's gonna cost me an extra hundred and fifty dollars a month.

So now you're only gonna make ninety eight fifty.

Right. Right. Exactly. That's that's the that's I don't look at it as costing an extra hundred and fifty dollars.

I look at it as losing ten thousand dollars. Right. Right? And, you know, I I I understand that apprehension that a lot of business owners have today, you know, because because everything is costing more.

Right? They're also spending more money on their food, on their fuel. Right? Just like just like you and I are individually and everybody else is.

But how we make a living, right, is is, conducting smart business. And, you know, as a business owner, when when your competition is out there and they're all good at buckling down, it doesn't necessarily mean that it's the right time to get into, an opportunity. But it is a good reason to give it some thought in in the way the the cost with the potential benefit. Right?

Our clients also have to keep in mind that that, you know, they don't just print money. Right? They've got clients, and their clients have clients, and their clients have clients. And there does tend to be a trickle trickle down effect with how business flows during a time like this.

Sure.

But again, this is when, you know, this is when, you know, we've made the decision to take charge of of our own business and, you know, work our financials in a in in the most profitable way that we can. Right? And Sure. You know, when we have some you know, just like every other business, we've got some months where things are a little up and down. And so, you know, we make decisions based on based on that moment, but also what we expect to see as a return. And, and I think that that's what a lot of our clients are are understanding today is that this change in an interest rate, you know, the change up, yeah, it had a little bit of an impact, but but not substantial.

They're not waiting for the rate to drop down because, again, you know, maybe they'll save a hundred and fifty dollars a month, but it's gonna, you know, take three, four, six months to get there and they just lost thirty to sixty thousand dollars in in opportunity profit. And this is on a small scale. Right? We Right. We deal with small businesses. We deal with large businesses.

On a for a larger business, yeah, they've got more things to consider, but also the impact the impact of the equipment can be larger.

Right. More than anything, when it comes to, a lot of these decisions, I I think it's it's, you know, it's sticker shock, which means it's an emotional decision.

Right.

And when you're talking about making decisions for your business, emotions are they're just not your friend.

They're not. It's the you can't avoid them, but you have to you you have to you have to kinda take stock of where you're at in that situation.

Right.

Right?

You know, and I guess, fortunately, we're unable to, you know, completely act like machines in those those situations. But we, you're gonna you're gonna respond. Your emotions are gonna be based off of your past experiences, not what's not what's happening in this exact moment. It's how this moment compares to what you've seen in the past.

Right. Right? So people are looking at this situation today, and they're thinking about o eight Right. Which is completely different situation.

Yep.

Right? But there's that burn. I've got a two. You know, that was a rough that was not my favorite, you know, year.

But this isn't this isn't the same situation. It's, there's similarities similarities in rates and cost of things.

Yeah.

But in o eight, a quarter of the people you knew were probably unemployed.

Correct.

I don't know anybody who's unemployed currently.

Right. And, Yeah. The market's strong in that situation right now. Yeah. Absolutely.

Yeah. Yeah. Very, very low unemployment, and there's nothing to suggest that that's gonna change anytime soon.

You know, it's it's funny because we talked about taking emotion, as much as possible out of, making a smart business decision. And one group of people that is famous for banking very bad, on average, not all of them, but, they have a reputation for making very, very bad business decisions are medical professionals.

K.

And it's a funny story because about, three or four months ago, a a good friend of mine from college Mhmm. Who's a dentist called me up and he asked me, Rob, do you do you guys, lend money for me to buy a a used, CEREC machine.

Those are the I remember.

Yep. Yeah.

The the three d machines that you fill in people They make they make implants.

Yeah. Implants and, crowns and and so forth. And I said, yeah. Yeah. We we we do that.

And knowing him, I I know he's been a dentist for twenty five years, which is dating me a little bit. But he and, I'm pretty sure he's got decent credit. Mhmm. So I told him what his rate would be. Now in in in our world, we're never quoting a rate. We're quoting a a payment. But I said if if it would had been a a a interest rate, this is what the interest rate would would calculate out as.

And he he got silent, and it was clear he was not going to be moving forward with that.

Mhmm.

And the rate he he expected his rate to be, under eight percent. Mhmm. And at at that time, I think that the mortgage rates have come in a little bit. But at that time, the pro the interest rate, if you were to go get a home mortgage, would have been eight and a half percent.

And I I said, so wait.

A home is an appreciating asset.

Yeah. It's an asset.

And we're talking about a used piece liability.

Yeah. Used piece of dental equipment.

Yeah.

And you and you think your rate's gonna be lower Mhmm.

Than, if you bought a house.

Now that's that's just insane.

Yeah.

Now I didn't follow-up with him. I hope he either went to his bank or paid cash because if he forewent a business opportunity, because I know the dentist, they get these machines, they make all sorts of money with them.

Yep.

If he forewent a business opportunity because he was butthurt Mhmm. That his rate was gonna be higher than a home mortgage. Mhmm. Well, that's just why medical professionals have a bad reputation as business people.

You know, that that's not a that's that's not a unique situation, unfortunately.

You know, I've I've I've run into a situation like this many times.

Medical professionals, yeah, we've I've run into that with them as well. I think, I think a lot of the time right there, they're not, they're, you know, they're not typically sitting in an office, watching numbers, making them work. They're the ones that are actually doing a lot of the work. Right.

Right? Like, they're they're they're seeing patients. They're trying to, you know, handle their books. And it's a it's a it's a they're spending all their time, you know, in the business but also working.

Right.

And, when when you're in that type of a position and you're not just sitting there focusing on the numbers, you're focusing on the day to day, it is very easy to kinda get caught up in this.

This is just gonna add an additional expense. It's gonna add you know, I don't know how much additional work it's gonna bring in. There's there's these questions. And, you know, typically, it it it really comes down to, you know potentially comes down to fear. Potentially, it was a good move for him. Obviously, we don't know the end of the story, but but, like, it it's it's not unique.

We had a, a customer that's in the drilling business that, decided to not make a purchase about twelve months ago because the he thought that the vendor on the equipment should come down five to ten k on the equipment, and he also thought the rate should be a point or two less.

K.

Okay.

Didn't wanna make a move.

You know, he's a he's a good client.

But at this point, he was he wasn't convinced that it was the right deal, not because he couldn't bring in money with the equipment, but because he had in his mind a cost for the equipment and a cost for the financing. And because those weren't met, he decided to take a pass.

Well, a couple months back, he called our sales rep that was working the deal and apologized for wasting his time a few months ago, thanked him for the knowledge, and said, I've, you know, got my head out of my ass. I'm ready to do this deal. Yeah. And, our sales rep asked him, like, well well, what's changed? He said, well, interest rates have gone up and so has the cost of the equipment, and I haven't made any more money.

So, you know, we ended up moving forward with the transaction, you know, on on our end. Right? It's it's, it was I mean, it's kinda like a pass through type of a situation for us. We're not making any more because the interest rates are higher. Sure.

You know, we we did our job for the client. The vendor did their job. Our client called us, gave us a five star review, and it's just as tickled as it could be. And this is the same person that a year ago for the same equipment was not willing to do the deal and it cost less and the financing cost less than when he actually pulled the trigger. And then pulling in the trigger on the equipment came down to, you know, like, shit. What did I do? Like, this equipment's gonna bring me fifty to six, fifty to sixty thousand dollars a month in revenue, and it's gonna cost me, you know, five thousand dollars a month to operate plus the plus the monthly payment.

Right. So he basically, he he saved he he for forwent Mhmm.

The purchase to save try to save ten thousand dollars Mhmm. In it in the process Mhmm.

Missed out on four to five hundred thousand dollars in profit.

You know, when I look at this situation, I see I see a customer that, had all the best intentions. Right? Just which is trying to save himself some money. Right? Keep that payment as low as possible, but then became, like, emotionally tied to this number.

Right.

The number didn't exist because the equipment cost more and the rate was higher. Yeah. Right? So the number that he had didn't exist. So he could have made it work, but you don't have to come up a bunch of money out of pocket if you wanna do that. But it was it was decision that was based on fear of of growing, at a time when he thought things cost too much. Well, a year later, they cost more.

Right? Yeah. And he's making a killing. He's absolutely making a killing. I'm super proud of him. And and we've we've been able to help him out, you know, several times throughout the years. But this most recent opportunity is just one that's gonna stick in my mind forever.

It's not a situation, like, where I look at them like we were right. Right.

You know, because we don't know that customer's situation.

Our salesperson on that, transaction, took the time to explain the situation and handled the client, you know, with with respect and welcomed them back when when the time came.

Sure. Sure. Now, there are times when the rate can make a difference in your buying decision. Sure. You used to work at a a deep, deep, deep subprime lender.

Sure.

And so let's let's talk about that.

Mhmm.

When when are rates so egregious that they would realistically steer you away from a purchase?

Yeah. So, you know, just like just like when you're making a purchase, and you have, you know, good credit and you're getting a good rate, it still comes down to you and, you know, to to the client and and their own, you know, their business, what they have going on. Right? I don't know.

We talk with our clients about their monthly expenses to run the equipment, what their current expenses are, future profits, current profits. We talk about that so that we can help them make an informed decision and help them create a, a finance structure, you know, that's advantageous to their business. Right.

But, you know, there's absolutely been some times when it makes sense. You know, there's a lot of times when it makes sense to to do a higher rate loan.

And then there's other times it's not, but a lot of it's it's gonna come down to, that specific, you know, business and their business model.

Right.

Right? And so when I look at it, it comes down to more like, how sure are you about the about the income that you're gonna generate with the equipment? And what factors play into that? Right. Right? So, let's take the transportation industry, for example. You know, we we do a lot of business in that, you know, in that vertical.

With transportation, there's a lot of outside factors. Right? There's the cost of oil, there's the cost of the insurance, and those are those fluctuate mostly, you know, on the going up end. But those fluctuate, you know, constantly.

Same thing with freight rates. Yep.

If they're if a if a trucker isn't working for themselves, they're not setting their own rate.

And so that's another thing that they don't have impact. A lot of them don't, you know, set up their own work either, you know. And so in those situations, they're they're beholden to somebody else to set them up with work, but they've got all these fixed expenses. That can be a a tough situation.

Yeah. Yeah. I'll I'll tell you a couple of things. Well, number one, in in the freight market, it never ceases to amaze me how volatile the the pricing is.

Because, a a few years back during during COVID Mhmm.

We were seeing, like, for for reefer freight, guys were getting north of four dollars a mile.

Yeah.

And then I've seen other other times when they were getting under two dollars a mile Yeah.

Which at under two dollars a mile You're not making any money at that point.

You're not making any money.

But I also do remember, this must have been six or seven years ago.

There was a a a subprime lender that had popped up. Didn't last very long because that their guy went to jail or something.

But Okay.

They were, they would buy any garbage deal that came across their desk. But the way they determined the pricing was they took the, you know, if it's gonna be a thirty six month deal, they took the cost of the truck, divided it by thirty six, and multiplied it by three.

Yeah.

And That's a lot. Yeah. You can't make the math work very easily there No. Unless you're getting, you know, four dollars a mile or something.

Yeah. Look. I'd I'd say this. Like, when it comes to higher interest rates and, you know, higher the higher the interest rate rate, the more impact it's gonna have on your monthly payment.

And And when you're buying equipment, it's not about the rate. It's about the difference between the cost to, you know, buy and run the equipment versus the amount of revenue that the equipment's gonna help generate for the business. Right. Right?

So in in that type of a situation, right, if you've got a an extremely high, rate rate opportunity, but it's the only one that's available at the time, Yeah. You have some things to consider. Is it make sense to, you know, to make a move on that, or does it make sense to try to improve the credit situation at that point?

Right.

At that point, it really I would I would be looking at how much money is coming in and and what's the amount of money that's gonna go out for the cost of the equipment taking into account the other expenses that you have to run it. Sure. And then you can make a a decision. The the I guess the I think what you and I are both talking about is, kinda, you know, when you look at the interest rates or you look at cost of the equipment, like, get rid of the heebie jeebies because that's just you in your head thinking about, like, oh, it costs too much or, you know, whatever the situation is. What we're talking about is, to make a smart business decision is to remove the heebie jeebies and to take a look at the current situation so that you can make an informed one, an informed decision. Right.

Not yeah. Nine out of ten people that come to us for financing, they know how much money they're gonna make with the use of the equipment. It's, you know, it's it's not a secret. No.

And and the fact is if you know your business, you're gonna know.

Now some people don't know their business and they shouldn't go do anything. But, the vast majority of people, all all you have to do is write down what what what am I gonna bring in?

What are my costs gonna be? Mhmm. What's that payment on the equipment gonna be? Mhmm.

Is there enough profit there that this makes business sense?

And is it sustainable? Right. Right. That's the other thing. Right? That's a different situation when you're looking at, like, fad businesses.

Right.

You know, that are in, you know, you'd make as much money as you can in a year or two because then it's, you know, it's on to the next thing.

But Yeah. But I'll tell you, we usually avoid those type of businesses. That's not our that's not our client base.

Yeah. We'll we'll get we'll get folks calling in because they wanna do crypto mining. Yeah. And then they get upset because we refuse to work with them.

But that's the Somebody will.

Well, somebody will.

Yeah.

But not us. We work with real businesses. And Yeah.

If you think you're going to to make Crap Coin Yeah.

Out of a basement and that that's gonna be how you get rich is by buying video graphic cards. I I don't really understand that business. I just know that everybody who's called us about it is a clown.

That's not a real business. But when we're talking about a doctor's office, a company that moves things, a company that builds things. Mhmm. These are real businesses, and the owners of the business typically know exactly how much Yeah. An asset's gonna cost to maintain and how much it's going to produce in terms of revenue.

Mhmm.

Absolutely.

Yeah. I think that that's that's that's what we're all about in this in this situation, you know, that we're in currently.

Things cost a little bit more. But it's but it's like that for everybody. Right? Nobody's unique in that things are costing more for them. That's not where we're at.

You know, so we're all running into the same situation, and and it's not a secret. But at the same time, I think, you know, allowing, you know, business owner that allows himself to take a look kind of beyond the, you know, the fear of the unknown of what's happening, you know, like, right now today, and instead start looking at, okay. But do I have a sustainable business model? Is this something I can scale?

Is it does it make sense to do it now? The rate will have maybe a little bit of an impact in that decision, but it more has to do with about the sustainability of that cash flow. Right? If we have if you're gonna make if you're gonna make a purchase, it's gonna cost you two thousand dollars a month.

It's gonna generate you fifteen, and you don't see any reason why, that would slow down.

You do that as many times as you possibly can because you're gonna be whole within a year.

Yep. That's absolutely right. Yeah. My last parting thought on this because we do have, you know, sometimes we'll we'll talk to folks and they they think the sky is falling.

Mhmm.

Because interest rates, let's face it, are back to normal, because they're they're pretty close to what they've they've been historically on average.

Yeah. Don't get me wrong. They were awesome for a few years there. Right. But that we shouldn't keep that in our mind as, like, what what we can expect.

Right.

We gotta be But the truth is Yeah.

During the seventies, which was the famous high interest rate era Yeah. A lot of the most successful businesses in the world that are still around today were created.

Mhmm.

There's a lot of wealth created in the seventies, and I guarantee you, there was a lot of people that didn't take advantage of it because they were busy playing let's cry about things instead of let's take advantage of opportunities.

Yeah. Regret's a tough one.

Yeah. Thanks for watching, everyone.

Always remember, if you wanna be talked into or out of a good or a bad business decision, we're happy to help. You can, find us at w w w dot smarter finance usa dot com or call and talk to one of our bright shining individuals at 866-631-9996.