Everyone understands that interest rates affect financing costs.
It’s no surprise then that, given daily headlines about rates, financial managers regularly ask our bankers: How should the Federal Reserve’s stance on rates influence my decisions about equipment acquisition and financing?
It’s a reasonable query, but here’s what we tell them: the Fed’s position on the overnight federal funds rate isn’t particularly relevant to your equipment strategy.
Fed funds is the rate banks charge one another for overnight loans. It influences shortterm interest rates across the economy, but it has no immediate or consistent correlation to the rates you pay to finance equipment. Most equipment is financed for 3, 5 or 7 years, or longer, depending on useful life. Thus, medium-and long-term rates, not short-term rates, drive equipment financing costs.
There isn’t always a direct correlation between short- and longer-term rates. Historically, rates tend to climb along the yield curve, but an upward slope isn’t guaranteed. During an inverted yield curve, like July 2022 through early last year, medium and long-term interest rates can fall below short-term rates.
Simply put, other factors should drive your equipment financing decisions:
Business cash flow
Many companies need equipment to generate revenue and grow. For them, acquisition is often a necessity. If existing equipment is nearing end of life, and is needed to operate your business, you must replace it, regardless of rates. Similarly, you may need to add equipment to meet growth goals.
Replacement cycle
What’s the economic useful life of your equipment? This may drive your timing and borrowing structure decisions.
Typically, you will base your replacement cycle on the equipment’s useful life. Good asset management also considers maintenance costs. Like a car you drive, equipment becomes more expensive to maintain over time, holding onto it too long can be costly.
Debt posture
Which matters more, getting out of debt quickly or minimizing monthly payments? This priority will influence the loan term you choose.
Bonus depreciation
The One Big Beautiful Bill Act’s 100% expensing provision allows a company to deduct the full cost of eligible short-lived assets in the first year they are placed in service. You can take advantage of this tax benefit if your business is tax efficient and can fully use the depreciation in the quarter of purchase. If not, leasing may provide an indirect advantage. The lessor reaps the tax savings from the 100% deduction and can pass it along to your business in the form of a lower implicit rate on your lease.
Evaluating the options
There are many approaches to equipment acquisition and financing. At Hancock Whitney, our equipment finance specialists can help you evaluate structures and determine how to best leverage opportunities like bonus depreciation.
For more information, visit hancockwhitney.com.
