Can we discuss rates, the economy, and equipment investment for a minute?
There’s this quote about the stock market that resonates with me: “Time in the market beats timing the market.”
The meaning behind the quote is simple: it’s pointless to try and “time” the stock market. If you want to be in, then get in, and don’t worry about outside factors like the economy, interest rates, doom and gloom news, or whatnot. Just ride out whatever it is. Time in beats timing.
I feel this same quote and meaning behind it are useful in the construction industry as well. As someone who has been familiar with equipment financing for almost two decades, I think back to clients who have financed equipment whenever they needed it, and those who didn’t because they were spooked economically. In almost every case, the ones who press forward in any economy are the largest successes, while the ones who are always tentative are not.
So why talk about this in Q1 2024? Well, we’ve just went through a year and a half of rate increases, half a year of “will they or won’t they raise again” speculation, endless predictions of recession, and a contentious presidential election looming.
In other words, it’s the PERFECT opportunity for construction companies, especially newer ones who haven’t been through years of economic waves, to reason away growth. Which, in almost any scenario, would be a mistake.
Let’s go over a few reasons why companies put off acquiring needed new equipment, and my responses to such:
“Rates May Come Down Later”
I’ll be blunt here: meaningful rate drops occur over a timeframe measured in years, not weeks and months. If rates fall this year (and that’s a questionable if), they will do so 25 basis points at a time. If we’re really, really lucky, we’ll get perhaps three rate cuts of that magnitude this year.
Even if that happens, the rate you will pay is not going to make a large enough difference to matter, especially if we’re talking about acquiring revenue-producing equipment when you actually need it. Generally speaking, on a five-year equipment loan for a backhoe, 75 basis points might mean a few hundred dollars total over the entire loan term. Heck, many companies will use that backhoe to earn that in an afternoon.
If the equipment you are considering is going to earn revenue, and we’re not talking about financing tens of millions of dollars, the “rate math” is overwhelmingly in your favor. Don’t let pennies cost you (big) dollars.
“Recession is Coming”
Oh, look, this again.
I heard the same thing all of 2022. Then, all of 2023. And I’m still hearing it. The thing is, the doomsayers are technically right – given our entire economic history of long periods of growth and short downturns, a recession will eventually come. And whenever it does, we’ll soldier on like we always have. But making like a turtle and pulling in at the prediction of it (which is ever ending in today’s 24/7 news cycle) is silly. The sad part is that there are companies who sat out all of 2023 waiting for a recession that never came.
“But the Election…”
What about it?
We have a presidential election every four years, and every four years they say it’s the most important one in history. Ok then.
Seriously, no matter who wins, approximately half the country won’t like it. And in the years that follow, no matter who is elected, there will be economic peaks and valleys, just like there always are.
We’ve let politics dominate our lives, families, and friendships far too much. Don’t let it affect your business too. Ignore your social media feeds.
Wrapping Up
For me, it all comes down to need. If you need a piece of equipment to operate, produce revenue, or grow, then you need it. Trying to time things by predicting something as unpredictable as the economy is silly. And waiting for a 25-basis point rate drop is even sillier.
Quick disclaimer: This doesn’t mean ignore everything. For example, if your state is about to pass a regulation that will affect how and where you work, yes, definitely pay attention to that. But other than the obvious things, the general chatter and doom and gloom should largely be ignored.
In the end, if it’s time for you to grow, then it’s time for you to grow. And you should heed that call. That’s what being an entrepreneur is all about.
All views expressed in this article are those of the author and do not necessarily represent the policy or position of Crest Capital and its affiliates. These views are also opinion – always speak to your accountant or tax professional before engaging in any financial contract or tax matter.
