Tips for Navigating the Current Equipment Financing Environment

If you’re soon going to be in the market for some new equipment, here is what you need to know about the current lending environment

Tips for Navigating the Current Equipment Financing Environment

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Have you priced out new equipment lately? Talk about
sticker shock.

Equipment prices jumped during the pandemic — sometimes 30% to 40% — and remain high. Interest rates climbed also. Loan rates previously at 5% increased to as much as 9.75% in 2023, says Jim Thomas, owner of Key Commercial Corporation, a St. Louis, Missouri-based commercial equipment finance and leasing organization that serves mom-and-pop businesses with five trucks or fewer.

When interest rates are high, borrowing money becomes more expensive, and businesses find it more difficult to obtain financing. Although the future of interest rates remains uncertain, the Federal Reserve forecasted three rate decreases in 2024. Kevin McGinn, senior vice president of Commercial Credit Group, says that successful organizations have learned to adapt to the higher cost of doing business in the past few years.

“Interest rates may come down, but I wouldn’t count on it,” he says. “I wouldn’t plan your business model based on those forecasts, either.”

Commercial Credit Group is a Charlotte, North Carolina-based organization providing commercial equipment financing for construction, manufacturing, transportation and waste companies. 

“Equipment prices are sticky,” McGinn continues. “They don’t come down as fast as they go up. It’s something that everyone has to deal with.”

McGinn and Thomas recommend the following lending strategies for contractors considering the purchase of a truck or large equipment soon.

Determine what you can afford

Because of the higher cost of borrowing money, McGinn encourages contractors to only buy the equipment that they absolutely need. 

Likewise, Thomas encourages contractors to purchase equipment that’s suited for the job. 

“Buy equipment that’s going to hold up, that will do the job and serve you for the four or five years you’re going to finance it for,” Thomas says.

He advises contractors to think about cash flow when purchasing equipment. 

“Let’s say [a contractor] has a contract to pump 20 septic tanks for a mobile home park. He knows how much that’s going to generate, and he needs a truck. Now he knows what he can afford to spend, and that’s what he’s looking to purchase,” Thomas says.  

Negotiating loan terms

In recent years, McGinn says he has seen contractors lock in longer terms. Instead of a five-year term, they might finance a truck or other equipment purchase for six or seven years. 

“That’s one way to keep their monthly payments down,” McGinn says.

But if a lender accepts longer terms, sometimes the lender requests more collateral in return. 

Key Commercial Corporation offers 36-, 48- or 60-month financing. Thomas advises contractors to forecast how long the equipment will be in service when negotiating interest rates. A truck with 30,000 engine hours, a gas engine and high-maintenance moving parts might not last for 60 months. 

Maintaining equipment

One way to avoid purchasing new trucks and equipment is to keep your current equipment operational by
maintaining it well.

“A lot of companies buy equipment more often than they need to because they don’t maintain their existing fleet. They just let it run down,” McGinn says. “It’s true that it does cost more to maintain equipment, but in the long run, it’s a less expensive tradeoff.”

Investing in older, used equipment instead of new equipment also saves money. Thomas works with lenders who are quick to finance used equipment.

“My best rates come from a bank in Indiana, and they have no fear of older trucks,” he says. “They’re interested in the kind of business, the kind of bank account the customer has, and his personal credit.”  

Personal and business finances

To improve the ability to secure a loan, McGinn advises clients to get their finances in order. Contractors with accurate financial statements have more leverage when negotiating the terms of a loan. Lenders typically ask borrowers to complete a credit application and provide several financial documents, including personal tax returns. 

Because personal and business finances are so closely related, Thomas advises clients to attend to their personal
financial obligations.

“The best advice I can give to someone starting a business is to take care of your personal credit,” he says.  

Be proactive

Good equipment, new or used, is harder to find than it was five years ago. 

“The supply chain, especially on chassis, is still an issue,” McGinn says.

With equipment being scarce, if contractors wait too long to start working with a lender, the equipment may be gone by the time they secure financing.

“If it took me a week to get someone financed, the dealer probably sold it to someone else,” Thomas says. “I had that happen a lot in the last year or so.”

“The earlier you start on the financing side, the better,” McGinn adds. 

Raise customer rates responsibly

To account for rising expenses, contractors may decide to raise their rates. Although consumers are familiar with today’s higher prices for goods and services, contractors still need to be careful about raising prices. They don’t want to lose customers or sales. McGinn advises contractors to be upfront with clients, phase-in price increases gradually, and maintain quality of products and services. People will pay more for quality.

“As long as you’re providing the service, those price increases are a lot easier to pass along,” McGinn says. “If your service is just adequate, and you go to one of your customers and say you’re bumping up the price, it gives them more incentive to start looking elsewhere.”

Before bidding on a long-term project, contractors should carefully assess the current and future economy and the cost of doing business, he adds. 

“You can’t rely on old models you may have used when forecasting your revenues and expenses,” McGinn says. “You have to adjust those percentages. What’s equipment debt going to cost? What’s fuel going to cost? All of those items need to be re-evaluated.” 

Keeping cash flow high

High interest rates can put a strain on a contractor’s cash flow and affect the timing of adding or replacing trucks or large equipment to the fleet. But by following these business finance recommendations, contractors can still expand their fleet, replace equipment and increase output while keeping cash flow high.


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