Financing construction equipment in 2024’s economy

 There are two simple truths when it comes to business equipment.

 First, almost all construction companies need equipment on an ongoing basis, be it heavy machinery, tools, other vehicles, office equipment or nearly anything else. No successful, growing company can go years without buying equipment. 

 The second truth is more than 90 percent of construction companies will acquire this equipment—either new or used—by financing it. Whether they go to the bank, an equipment financing company or use dealer financing, monthly payments are almost always how companies acquire equipment.

 Knowing that, what is the state of equipment financing in 2024? And how can you be sure you’re getting the best rates and terms? Let’s look at a few factors that affect construction companies looking to finance or lease equipment.

Will rates be dropping anytime soon?

The biggest question on everyone’s minds in the last few years is rates. That question makes sense when rates have gone up like they did in 2022 and 2023. And they haven’t dropped since.

The thing is, historically, these rates aren’t “high” at all. They are only high compared to the rock-bottom rates of 2009-2016 and 2020-2022. In fact, most economists now feel those ’09-era rates were too low to be sustainable, and the only reason they were lowered again in 2020 was in response to COVID-19.

So, in a nutshell, we’re suffering from sticker shock, and rates are probably pretty close to where they will be for the foreseeable future. Yes, there will possibly be a small cut sometime in 2024, and maybe one or two more small cuts in 2025, but realistically we are not looking at anything that will make a discernable difference for small- to mid-sized companies borrowing for needed equipment. Rates are unlikely to return to those salad days we’re remembering.

The takeaway here is, don’t worry about where rates are. When you need equipment, you need it. Even if you borrow and then rates go down, the difference in your payments will likely be measured in $10 increments (e.g., $1,679 a month now, $1,651 a month if you bought it in six months after a slight rate drop).

The math says, compared to the revenue new equipment brings, getting it when you need it is a no-brainer. So let’s move on to our next hot economic topic: lending restrictions.

What about restrictions? Has lending become tighter in 2024?

Yes, lending has become more restrictive over the last few years. Banks are using more and more restrictions for business lending. These restrictions come in three popular forms: blanket liens, compensating balances and annual requalification. Let’s look at all three.

• Blanket liens: Your company borrows for needed equipment, and the bank slaps a lien on your entire company. In other words, they lock up everything you own. That truck you’ve owned for a decade? You can’t sell it unless the bank says OK. Blanket liens are exceedingly restrictive, and banks use them almost across the board.
  
• Compensating balances: Most banks will require 80 percent of the loan amount is always kept in an account with that bank. If you must keep it there and can’t use it, whose money are you really borrowing?
  
• Yearly requalification: Banks will make you requalify for the loan every year, and reserve the right to call in the loan immediately if they don’t like what they see. That can cripple a company that had a bad quarter.
  

These restrictions reside in the fine print of your business loan contract. But there is good news—if your credit is good enough, you may be able to negotiate these away (and that’s advised, although it may prove futile with banks).

In addition, plenty of “non-bank” business lenders have great rates but do not use these restrictions. Work with one of them if you find these restrictions unacceptable.

The overall economy

We kept hearing about an inevitable recession in 2022-2023. If you turtled up and sat waiting for it, guess what? It never came.

Honestly, macroeconomic news is increasingly noisy and far from all-inclusive, and should be treated as such. What matters most is your own bottom line.

If things are looking positive for your company, keep doing what you are doing. In fact, do more of it.

And if the current economy is treating you poorly—if your revenue is down despite the “GDP is fine” news—it might be time to change something up.

Either way, smart companies take action when necessary, not when the “news” is good or bad. And that extends to borrowing.

Wrapping up

The biggest takeaway for construction companies borrowing in 2024 is not to worry too much about rates or the overall economy, but definitely pay attention to lending restrictions. Those will affect a company much more than a few rate basis points or a doom-and-gloom headline. 

Dan Furman is the vice president of strategy at Crest Capital, which provides small- and mid-sized companies restriction-free financing for new and used equipment, vehicles and software, as well as offering equipment sellers a simple and risk-free financing program. Visit www.crestcapital.com for more information.

All views expressed in this article are those of the author and do not necessarily represent the policy or position of Crest Capital and its affiliates. These views are also opinion—always speak to your accountant, tax or insurance professional before engaging in any purchase, financial contract or tax matter.