By Anthony Sasso, President, TD Equipment Finance (TDEF)
Businesses and financial institutions are continuing to pay close attention to the Federal Reserve, which recently raised its benchmark short-term interest rate by 0.5%, marking the largest increase since 2000. Additionally, Chair Jerome Powell told reporters that similar moves were on the table for the Federal Reserve’s next two meetings in June and July to help restrain inflation, which is currently running at its highest level in 40 years.
Along with these additional anticipated Fed rate hikes, there is a great deal of uncertainty with political tensions overseas and we are continuing to see economic challenges resulting from the COVID-19 pandemic, including significant labor shortages and supply chain delays.
This is not to say we should look to the future with a sense of doom and helplessness. Instead, it’s important that we acknowledge we cannot predict the future. There will always be uncertainty, challenges, and economic disruptions outside of our control.
Rather, the question to ask is: What can businesses do to make their equipment financing resilient to today’s challenges and future uncertainty?
After more than 30 years in the equipment finance industry, I would like to offer a few tips that I have seen benefit businesses during similar economic cycles and can better position companies facing uncertain times.
Tip #1: Lock down interest rates. Businesses should consider converting any floating rate obligations to fixed rate loans or leases for their equipment financing. Locking in interest rates can help business owners free up liquidity by ensuring they have more control over their loan or lease payments, and they will not be subject to increases should there be additional rate hikes. Businesses should take advantage of the window right now before the next meeting of the Federal Reserve, where additional rate hikes are anticipated, and speak with their financial institution about their options for locking down the rates for equipment financing.
Tip #2: Implement a sale-leaseback. To free up liquidity, businesses may want to implement a sale-leaseback which enables a company to sell assets to raise capital and then, lease the asset back from the lessor. This is especially beneficial for businesses that purchased equipment in cash and need additional liquidity on their balance sheets. Liquidity is in high demand, especially, right now. Many businesses need this liquidity to invest in labor, which continues to go up in price because of the surplus of available jobs. In fact, according to a recent article in CNBC, there are 5 million more job openings than workers in the U.S., meaning there are 1.8 jobs for every unemployed person, and businesses will need to leverage their liquidity to attract and retain talent to keep their operations running efficiently.
Tip #3: Stay focused on adhering to your equipment replacement schedule. Businesses should pay attention to the health of their fleets and when certain equipment may need to be replaced. For example, older power units can be less fuel efficient and have higher maintenance costs putting a further strain on liquidity, especially as fuel costs continue to rise. Additionally, due to current supply chain issues, it may take much longer to replace equipment than previously expected. By staying focused on their equipment replacement schedules, businesses can do their best to plan for when they may need to make a large financial investment in their fleet and ensure they have the capital available to do so. Along with rising fuel costs and supply chain challenges, businesses should also factor in pending Fed rate hikes, which could result in increased interest if the business needs to take out a new loan or line of credit to replace certain equipment.
Tip #4: Work closely with your banker. Along with the previous considerations, businesses should rely on their bankers as trusted advisors and work closely with them to develop tailored equipment financing plans to help them prepare for future uncertainty. Many bankers have been in the industry for a long time and have seen different economic headwinds and tailwinds and can offer advice to help maintain the health of your equipment financing and provide specific recommendations on how to keep your business resilient to external pressures, both known and unknown.
While there are many factors outside of our control, business owners can take key steps now to prepare their businesses for future uncertainties, so they can feel confident, no matter what the future holds.
About the Author
Anthony Sasso is President of TD Equipment Finance, Inc., a subsidiary of TD Bank, America’s Most Convenient Bank®. In this role, he is responsible for managing all activities of the equipment finance subsidiary including strategic direction and growth strategies in a multi-origination channel platform as well as product partnering and direct origination. Anthony has more than 35 years of equipment finance experience in the bank-owned equipment finance industry. He began his career with TD, when it was Commerce Bank, in 2001.