The business lending environment has gotten more restrictive. Here’s how to get the best terms. The simple truth is landscaping companies often need to finance equipment if they wish to grow.
Be it commercial mowers, vehicles, trailers, heavy equipment, trimmers, edgers, office equipment and more, no successful company can grow without a steady influx of new (or new-to-them) equipment.
Statistically, more than 90 percent of landscaping companies will acquire this equipment by financing it. Whether these companies use a bank, a third-party equipment financing specialist, or use in-house dealer financing, acquiring equipment via monthly financing or lease payments is common.
So, what is the state of financing and leasing landscaping equipment in 2024? Can we expect rates to drop anytime soon? Are lending restrictions increasing? And most importantly, how can a company ensure it is getting the best terms? Read on!
Interest Rates – Will They Be Coming Down?
To fight inflation, 2022 and 2023 saw a sharp uptick in interest rates by the Federal Reserve, which affected all lending. But it did work, as inflation has stabilized.
The hope now is that rates have peaked and should at least be stable for the foreseeable future. Indeed, we could see a few small rate cuts over the coming months as well.
That said, the current rates are not very high in historical terms. They are only high in relation to the extremely low rates of 2020-2022. In hindsight, most economic experts feel those rates were too low, and we should not expect to get back there anytime soon, if ever.
So, while rates will likely tick downward a bit in the future, they will not make a measurable impact for most small business borrowing. The difference in your monthly payment on common landscape equipment will be measured in “tens” of dollars, not hundreds. Which should hopefully pale in comparison to the revenue acquiring the equipment will generate.
What I am saying is the rate, while always notable, is probably the least important factor in financing needed equipment. To give a broad anecdotal example, if you finance equipment now with a payment of $787 a month, you might pay $766 a month if you buy it a year from now after a few 25 basis point rate drops (and that’s assuming the equipment is the same price a year from now, which is unlikely).
So the “rate takeaway” is this: go ahead and finance landscaping equipment when you need it, and be confident that the revenue it produces makes any future rate decreases moot.
You’ll also be much better served by paying more attention to the fine print of lending restrictions, which I’ll discuss next.
Has Lending Become More Restrictive in 2024?
Yes, it has.
While most lenders have increased their credit requirements over the past few years, the biggest factor is the fine print covenants and restrictions that many lenders (including nearly all banks) have written into their equipment financing agreements.
There are three fine-print clauses you should be aware of in particular: blanket liens, compensating balances, and annual loan requalification. Here’s a breakdown of all three:
- Blanket Liens: A blanket lien is when a bank places a lien on your entire company (hence the term “blanket”). This means everything your company owns now has a lien on it, even equipment you’ve owned free and clear for years. This can restrict your company, as you cannot sell (or even give away) anything without the bank’s permission. This is a steep price to pay just to finance a mower and a trailer or a few trucks.
- Compensating Bank Balances: Most banks will require a borrowing business to keep an account with them, and that account cannot fall below a certain threshold (typically 80% of the loan amount). So if you borrow $100k, you will need to always have $80k – that you cannot use – in that bank. In a way, that means you’re actually borrowing from … yourself.
- Yearly Loan Requalification: Qualifying for the original loan is often not the end of the credit scrutiny process. Banks will revisit your finances annually to make sure you still qualify for the loan. And they will reserve the right to call in the entire loan immediately. This can really hurt a company that has a subpar quarter or suffers a temporary setback because they lost their biggest customer.
These restrictions will be in the fine print of your equipment financing or leasing agreement. I encourage you to fully understand these restrictions and discuss them with your lender. If you are uncomfortable with these restrictions and cannot negotiate them away, find another lender that doesn’t utilize them.
The Overall Economy
Last point: the overall economy.
This is something that will be in the news constantly, especially in an election year. My advice here is to tune out the noise as much as you can. Here’s why: the news talked about a sure-thing recession in 2022. Then again in 2023. And they never materialized. If you holed up and waited for them, you probably missed some good opportunities.
The macroeconomic news and predictions will be increasingly loud. And they are far from universal. Your own bottom line is a much better indicator than anything: if you are doing well over the past few years, keep doing what you are doing (in fact, do MORE of it.) And if the last few years weren’t your best, then it’s time to change something up.
The bottom line is that successful companies act when they need to, not when the economic indicators say it’s okay.
Wrapping Up
For landscaping companies looking to borrow in 2024, pay more attention to the fine-print lending restrictions than the rates or any dark cloud economic news. The restrictions will affect your growth and revenue far more than a rate point or a headline will.
