High Interest Rates... A good reason to consider leasing
by
Dale Atteberry, Vice President of Systems Financial Credit... a Machinery Systems Company
Since 2004 the Federal Reserve has increased the federal funds rate 13 times with 8 of those increases coming in 2005. The related effect on the bank prime rate in 2005 was an increase from 5.25% to 7.25%. That is where most of our customers were impacted if they used their bank line to finance capital expenditures.
Most bank lines of credit are in some way tied to the banks prime lending rate and float as the banks prime floats. That means in 2005 if our customer borrowed $100,000 on January 1, 2005 the expected annual interest was $5,250. However, at the end of the year that same interest was $7,250, if the borrowing rate was the prime rate.
Current indicators are that 2006 will see additional increases in rates by the Federal Reserve as oil prices help to push up costs and inflation.
For these reasons, this is an excellent time for our customers to look at leasing when acquiring the equipment they need to meet production demands for 2006. Lease payments are quoted on a fixed rate basis for term of the transaction. Locking into a long-term lease for new or used equipment allows our customer to know what the financing costs are going to be in the future, and removes one of the variables to be managed in monthly cash flow as the year progresses.
Making the decision whether to use a fixed rate lease or variable rate bank line in an increasing inflation and interest rate environment can be significant over the term of the lease. I believe we should advise our customers of the potential money they can save. Please let me know if there is anything you would like me to do to support your efforts.
Dale can be reached at 847.490.7905 or dalea@machsys.com.
