How Rising Interest Rates Affects Purchasing Your Heavy Equipment
Construction companies are facing significantly higher costs for the machines they need due to increasing interest rates. Higher rates mean more expensive construction equipment financing options, making it more difficult for businesses to effectively manage the machine costs while maintaining a healthy cash flow.
We put together some tips that we believe may help you handle the current financial environment and have the equipment you need for the job, based on what we are seeing in the market.
Shop around for rates
One of the most important parts of construction equipment financing is to search for the best rate possible. You should look at several different reputable lenders or rely on a dealer like Pittman to do it for you. While shopping around for different rates, ask the lenders if they will offer a short term rate lock, so that if you decide to use them, the rate won’t increase a couple of weeks later when you make your decision.
Understand fixed vs. variable rates
When it comes to construction equipment financing, you generally have two options for your interest rate, fixed and variable.
Fixed interest rates – With this type of rate you pay the same percentage of interest each period. The interest rate is locked in, so no matter what happens to the market or the lender’s general interest rates, you will pay that fixed rate for the entire duration of your financing term.
Variable interest rates – With this type your rate will move up or down based on changes in the market. Usually, the variable interest rate is tied to an index rate, which is a benchmark rate that’s based on market factors.
Although with a variable rate the amount that you pay may go down if the market rates decrease, they could also go up if the market rates increase. Fixed rates are typically more popular for construction equipment financing, because it allows businesses to predict exactly how much they’ll be paying each period.
Consider heavy equipment leasing
With higher interest rates, a good alternative is heavy equipment leasing. This option generally allows for lower monthly payments, so customers can maximize their return on investment. They also remove the burden of needing to sell equipment when you are done with it, and make it easier to have the most modern, updated machines.
Make sure you can pay off without penalties
Some loans will penalize borrowers for paying off the loan before the term is completed. The reason for the penalty is that the lender will end up making less off the loan in interest. Ensuring you have a loan that allows prepayment without any fees will let you pay it off early and reduce your effective interest rate.
Reduce your costs through Section 179
Aside from finding the best rate for construction equipment financing and heavy equipment leasing, having higher interest rates means you have to take advantage of every savings opportunity available. Section 179 allows you write off the full value of your equipment on your taxes (up to a cap) right away, rather than being depreciated over time. For example, if you buy a new piece of machinery for your operation, and begin using it right away, you may be able to deduct the entire cost from your business’s taxable income when you file taxes the next year.
Trade in your current equipment
Trading in your current or old machines is another way to keep your construction equipment financing costs down. When you trade in with Pittman, we’ll take the residual value of your equipment and put it towards your new machine, which can serve as the full or part of your initial down payment. The result is that your rate could be lower and you could have lower up front costs, strengthening your cash flow.
If you have questions about purchasing a new machine or heavy equipment leasing, contact Pittman today!
This information should not be considered financial, legal, or tax advice. Consult your financial, legal, or tax advisor for additional information.