Inflation is on everyone’s mind these days. And the question of “will inflation affect financing rates” is a popular one.
The answer to that is clearly “yes”, inflation will affect financing rates. How much is unknown, but historical patterns can give us at least a small idea.
Inflation as a Response to Supply and Demand
The first thing to remember is inflation is a purely market-driven number, where interest rates are not (more on that later). Inflation is generally the result of supply and demand – when supply exceeds demand, items cost more. That may seem oversimplified, but it’s the backbone of Economics 101.
In other words, nobody controls inflation as a broad number. The inflation number you see on the news is simply measuring the rise of prices as a whole, on average. If just one commodity goes up short term (let’s say oil, because of a pipeline shutdown), that isn’t going to affect the national inflation number much at all, even if the price of gas goes up immediately. Inflation is longer-term, and broader.
Here in late 2021, we are seeing two things that are affecting prices, and neither one has an easy/fast fix.
The first is a general shortage of willing workers, of all skill levels. This is causing everything from “not enough people to make goods/parts” to restaurants and service businesses slowing up/closing because they are understaffed.
The second issue is also labor-related – not enough truck drivers. So even if goods are made and in demand, they cannot get where they need to be quickly and efficiently. So the price of everything is rising.
So we know about the “why” behind current inflation fears. Now what does inflation have to do with interest rates?
Interest Rates as a Response to Inflation
Generally, the Federal Reserve (“the Fed” for short) will raise and lower interest rates to either speed up the economy, or slow it down. And this usually happens for these two reasons:
1. If the economy slows down, the Fed will decrease interest rates. This gives businesses an incentive to borrow and start buying more goods. In other words, the Fed typically lowers rates to speed up the economy.
2. If the cost of goods rise too much (i.e., inflation is high) the Fed will raise interest rates to slow things down. If you make borrowing money more expensive, many businesses will say “nah” to buying something new. This decreases demand, and (hopefully) lower inflation and bring prices back to “normal” (whatever normal is).
Notice I said “hopefully” there. I say this because nobody really knows exactly how the economy works in a definitive sense. One thing we do know is it’s largely driven by emotion – how consumers and businesses “feel” about things. And interest rates can go a long way in making them feel good (or not so good) about a purchase. But it’s not a guaranteed fix (if it was, we’d never have a recession or inflation). Plus, no matter what the Fed does, the changes/effects are gradual instead of immediate.
Now, since we’re talking about this in late 2021, we’re in #2 of the above. Prices are rising, and at some point (fairly soon, most feel), rates will have to rise to slow buying down – it’s inevitable.
Where does that leave you? And what can you do about it?
Use Financing RIGHT NOW as a hedge against both inflation and rising rates.
As a business, you have a very powerful weapon at your disposal against both inflation and rising rates – you have access to fixed-rate financing at (for now) super-low rates.
Buying / financing equipment you need right now does two things: it lets you buy it today, when the price is as low as it’s going to be for the foreseeable future. And you also lock in a great rate.
For example, say you’re a construction company, and you know you will need a new backhoe and dump truck within the next three years. While nobody can predict the future, two things are pretty easy guesses: the prices will be higher three years from now, and so will the rate. Buying/financing them now is a smart financial move.
The importance of fixed-rate financing cannot be understated. Locking in a lower rate for the life of the loan allows you to enjoy lower payments years from now, while your competition who waited (or used variable rate financing) must pay more. In business, every advantage matters, and paying less than your competition for the same thing is a big one.
Shameless plug time: Crest Capital offers fixed-rate financing at a great rate. In addition, we’re about as fast as they come in getting you approved, so if you see available equipment, at an acceptable price, and you’re ready to buy, we’ll make sure you have the funds as close to “instantly” as possible.
Wrapping this up, my prediction is in: inflation is definitely coming, and rates are going to go up as a result. Locking in now is an excellent business move.
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