How to Manage Rising Interest Rates & Inflation on Equipment Financing

With inflation near its highest levels since the early 1980s, managing costs has become more challenging for businesses. The Federal Reserve has raised its benchmark interest rate multiple times since March 2022 to curb inflation, with the federal funds rate currently at 5.00% to 5.25%. This increase marks the highest rate since October 2000 and is likely to continue as inflation remains a concern.

But how do inflation and rising interest rates affect equipment financing? As borrowing costs rise, businesses in industries reliant on equipment—such as life sciences and healthcare—face added challenges in managing cash flow, as equipment costs are substantial even without inflation.

The good news is that while the current environment is challenging, there are ways to manage these impacts. From locking in rates to exploring leasing options, smart companies can navigate rising costs and position themselves for continued growth.

Effects of Rising Interest Rates & Inflation

Rising interest rates may make business owners hesitant to finance new equipment. However, securing critical items like lab equipment, medical devices, or production machinery is still essential for many. Higher rates increase borrowing costs and can lead to sticker shock as prices rise alongside inflation. This raises an important question:

Is it possible to continue financing equipment without straining cash flow?

Let’s look at a few strategies that can help businesses continue to acquire the equipment they need while managing costs strategically.

A Few Ways to Combat Rising Interest Rates

To navigate rising interest rates and secure essential equipment, consider these strategies. Each can help business owners manage cash flow and make the most of equipment financing options in today’s high-rate environment:

• Lock in Your Rate: Start by securing a fixed-rate loan or lease agreement to avoid future rate hikes. Fixed-rate financing, whether through a bank loan or an equipment finance company, can help businesses control monthly payments over the lease term. If the new equipment will improve productivity or reduce labor costs, moving forward now may be a sound choice, given that rates may increase further soon.
• Consider a Lease: Leasing allows businesses to lock in both the current price of equipment and a fixed interest rate. Unlike variable-rate loans, leasing typically involves predictable lease payments based on a fixed rate, making it easier to manage expenditures in times of economic uncertainty. For life sciences and healthcare companies in need of medical equipment financing, leasing offers stability and helps preserve working capital.
• Lease or Finance Before Inflation Increases List Prices: Although inflation rates have recently moderated, the potential for future increases remains. By financing or leasing equipment now, businesses can lock in today’s prices and avoid future price hikes on critical equipment.
• Find a Trusted Partner: Working with a knowledgeable lender or equipment financing provider can make a significant difference. Financial partners such as equipment finance companies often offer tailored financing solutions that prioritize the borrower’s unique needs. Unlike traditional banks, leasing companies may offer more flexibility in credit score requirements and financing terms, making it easier to secure financing without restrictive loan conditions.

How Can Leasing Help Combat Inflation?

In times of inflation, leasing provides a flexible, cost-effective solution for businesses to acquire essential equipment without large upfront investments. Here are some of the ways leasing can help manage expenses when interest rates and prices are on the rise:

• Reduces Capital Expenditures (CapEx): When lenders raise interest rates, traditional equipment loans may require higher loan-to-value ratios, demanding a larger down payment. Leasing, however, often eliminates the need for substantial upfront costs. Instead, lessees can make fixed, manageable lease payments, preserving cash flow and freeing up working capital for other business needs. By locking in the lease’s interest rate for the term, businesses can also ensure payments remain stable even if rates increase further.
• Reduces Total Cost of Ownership (TCO): Lab equipment, medical devices, and other high-tech equipment require regular maintenance to stay operational. Leasing can include service and maintenance within the lease agreement, reducing repair costs and improving operational efficiency. This setup often results in a lower total cost of ownership, as businesses avoid the need to fully cover maintenance, repairs, or end-of-lease considerations. Providers may even upgrade or replace equipment at the end of the lease term, allowing businesses to access the latest advancements without additional capital outlay.
• Depreciation & Expenses Can Be Written Off Faster: For many companies, the equipment’s value lies in its usage rather than ownership. With leasing, depreciation and certain lease expenses can be deducted more quickly, which is often advantageous for tax planning. Under accounting standards like IFRS 16 and ASC 842, operating leases can be classified as assets, providing tax-deductible depreciation and interest expenses.

Additionally, certain leases qualify for low-value or short-term exemptions, enabling companies to take full deductions in the profit and loss statement. This exemption is useful for small business owners who may be leasing multiple lower-cost assets, such as lab or office equipment. Evaluating these tax benefits can help minimize taxable income and improve cash flow. With rising interest rates and supply chain challenges, securing funding quickly is essential. Leasing companies bring expertise in equipment financing and often work directly with equipment suppliers, streamlining the financing process. This can be particularly helpful in healthcare and biotech, where timely equipment access is crucial for ongoing research and development.

Always Compare Your Equipment Financing Options

While leasing has significant advantages, especially during times of high inflation and rising interest rates, it’s important to evaluate all equipment financing options. Each financial service—from rentals and leases to ownership and lease-to-own arrangements—has its own benefits depending on a company’s specific needs and goals.

For example, short-term rentals offer flexibility, making them ideal for temporary projects or seasonal demands. However, they may not be the most cost-effective solution for long-term equipment needs. If a business requires specialized lab equipment or medical devices for an extended period, leasing or purchasing may be a better investment. Owning the equipment can also provide tax benefits, as depreciation and interest on an equipment loan are generally tax deductible.

Consider these factors when comparing financing solutions:

• Equipment Usage: Assess how long the equipment will be needed. For short-term projects, rentals might be ideal. For ongoing business operations, a lease or purchase could offer better value.
• Budget and Cash Flow: Fixed-rate leases provide predictable payments that can be easier to budget, while traditional loans may require a down payment and have variable interest rates. Leasing preserves working capital, which can be essential for cash flow management.
• Financial Reporting and Tax Implications: Different financing options impact financial reporting and tax deductions. Operating leases can improve cash flow by allowing businesses to claim certain lease payments as expenses, while ownership allows for depreciation over time.

Evaluating these factors will help business owners choose a financing structure that aligns with their financial situation, type of equipment needed, and long-term goals. In uncertain economic times, carefully weighing the pros and cons of each option can support informed decision-making, ensuring the best fit for your business’s needs.

Keep Costs Fixed During Uncertain Times

In an economic environment of rising interest rates and inflation, keeping costs fixed is essential for maintaining financial stability. Fixed-rate payments and stable expenses help companies in cash flow management, enabling them to plan more effectively despite fluctuating market conditions.

For industries like life sciences and biotech, where laboratory equipment and specialized tools are critical, managing equipment financing strategically can make all the difference. Through effective cost management and smart financing, companies can maintain stability and continue to invest in their essential equipment needs, supporting long-term growth.

Leverage Equipment Leasing with Excedr

If you’re looking for ways to manage rising interest rates and stabilize costs, equipment leasing can be an effective strategy. Leasing equipment provides businesses with a reliable solution for stabilizing costs. By securing fixed-rate lease payments, companies can protect themselves from inflationary pressures and rising borrowing costs. As inflation progresses, these payments become “cheaper” in real terms, allowing businesses to preserve resources for other important expenditures.

At Excedr, we provide leasing options specifically designed to support biotech, life sciences, and healthcare companies in acquiring the equipment they need. From laboratory devices to medical equipment, our leasing solutions help you maintain control over your costs while keeping pace with advancements in your field. Get in touch with us today to learn how our leasing services can help you meet your research and development goals—without the challenges of unpredictable financing costs.