Higher Rates Raise the Bar for Equipment Investment
The Federal Reserve has changed direction.
After cutting interest rates last year, the Fed raised its benchmark rate by a quarter percentage point Wednesday, bringing its target range to 3.75%–4.00%. It was the central bank’s first rate increase in more than three years, and most Fed officials projected at least one additional increase before the end of 2026.
Higher financing costs do not eliminate the need to invest; they make it more important to clearly define the goals of an equipment purchase.
A Higher Hurdle for Capital Investment
When borrowing costs increase, the financial return required to justify an investment can increase with them.
That makes the economics of the equipment increasingly important.
A manufacturer considering a new production system might evaluate how much additional output it could generate. Transportation companies replacing vehicles could consider maintenance expenses and fuel efficiency. A contractor adding machinery might look at whether the equipment would allow the business to take on additional projects.
In each case, the interest rate matters, but so do the financial consequences of not making the investment. Those costs belong in the calculation alongside the cost of financing. Older equipment can require more maintenance, while outdated technology can reduce productivity.
Look at the Investment, Not Just the Rate
The Fed’s latest decision also illustrates how quickly expectations surrounding interest rates can change.
Earlier this year, businesses were considering whether additional rate cuts might reduce financing costs. Persistent inflation, rising energy prices and continued economic growth have changed that outlook. The Fed is now moving in the opposite direction.
Trying to build an equipment strategy around predicting the next move in interest rates can therefore be difficult.
Finance leaders can instead concentrate on factors specific to their businesses: the purchase price, financing expense, expected useful life, operating savings, additional capacity and potential revenue associated with the equipment.
The objective is to determine whether the asset can generate sufficient value under the financing conditions available today.
Capital Planning Becomes More Important
Higher rates can also increase the value of preserving financial flexibility.
Paying cash avoids financing expense, but it requires committing capital that could otherwise remain available for other costs – including payroll, inventory, and expansion. Financing carries a cost, but it allows businesses to spread the expense of an asset over time.
Neither approach is automatically preferable.
The appropriate structure depends on the company’s cash position, expected return from the equipment and competing demands for capital.
The Fed’s latest move may make some equipment investments more expensive to finance. Even as borrowing costs rise, businesses still have equipment needs driven by growth, productivity, capacity and the replacement of aging assets.
As borrowing costs change, those expected benefits become even more important to measure.
Ready to Explore Your Financing Options?
If your business is planning an equipment purchase or evaluating financing options, Fidelity Capital can help you explore a structure that fits your needs.
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Disclaimer: This article is provided for general informational and educational purposes only. It may reference or incorporate information reported by third-party news organizations, financial publications, industry sources, and other publicly available sources. Fidelity Capital Partners, LLC does not independently verify all third-party information referenced, and such information may be incomplete, subject to revision, or change over time. Any analysis or commentary provided by Fidelity Capital Partners, LLC reflects our interpretation of the information available at the time of publication, including its potential relevance to equipment financing, leasing, capital planning, and related business decisions. Nothing in this article constitutes financial, legal, tax, investment, or other professional advice, nor does it constitute an offer or commitment to provide financing.
