Does financing capital equipment still make sense in a climate of high interest rates?

Anyone with a variable rate mortgage or bank loan will be aware that there has been a relatively sharp rise in the cost of borrowing over recent months. The cost of leasing and asset finance is also affected by the rise in interest rates that we have seen since the start of the year.

It is worth noting that the cost of a lease or asset finance agreement is calculated on the same basis as a fixed rate mortgage. In both cases the rate of interest is fixed for a number of years. This means that the price is based on anticipated interest rates for the term of the agreement, rather than the short-term interest rate set by the Bank of England. It is sometimes the case that a rise in the Bank Base Rate can be accompanied by a fall in the cost of fixed term finance agreements on the basis that ‘the markets’, which set the price for such products, assume that in the longer-term interest rates will fall. The opposite can also of course apply.

Current levels of interest rates are still relatively low in historical terms, it is just that we have become accustomed to ultra-low borrowing costs since the financial crisis of 2008/2009. The question, therefore, is whether a lease or asset finance agreement makes sense in an environment where the cost of such agreements are likely to be slightly higher than they might have been over recent years.

Below are the three benefits, I see, when you acquire capital equipment using a lease or asset finance in todays market:

Certainty

The cost of a finance agreement is still relatively low in historical terms. In uncertain times, the knowledge that the price is fixed for the duration of the agreement provides certainty and helps long term planning.

Cash reserves

If we assume that the business environment is likely to deteriorate in the immediate future, companies might well be advised to retain any cash they might hold to sustain themselves through a potential period of weakened trading rather than use it to purchase capital equipment. In these circumstances a lease or asset finance agreement offers a good solution.

Competitive edge

In a period of real uncertainty an obvious question is whether the time is right to invest a new equipment. A strong case can be made that such investments are essential. Gaining or retaining competitive advantage and improving productivity are now more important than ever. Leasing and asset finance provide the means for such investment without large cash outlay.

No one can be sure what will happen to interest rates over the coming months. However, if we assume that the cost of money is likely to increase, then a strong case can be made to bring forward capital expenditure. It’s important to ensure that the resultant finance agreements are locked into current interest rates and stock prices ahead of any potential increase in either.