As interest rates continue to rise and cash flows tighten, equipment dealers must find the best ways to navigate today’s hawkish interest rate environment to ensure access to funds.
Equipment dealers of all sizes must manage rising interest rates to meet customers’ needs and continue to grow, according to the American Rental Association (ARA).
In a recent webinar by the ARA, three best practices for navigating rising interest rates emerged:
1. Find a banking partner that fits your business size
Forming strategic partnerships is a way for businesses to overcome their deficiencies, and that logic extends to banking partnerships. For dealers, finding banking partners that meet their needs is key to navigating interest rates.
“If you are the biggest client for your bank, you’re probably not at the right bank, and if you’re such a small client for your bank that you don’t matter to them, you’re probably not at the right bank,” Ami Kassar, founder and chief executive of MultiFunding, said during the webinar. “You want to be sure that you’re in the bank sweet spot — especially if you’re giving them your deposits, you want to be sure that your bank is giving you access to funds and lines of credit.”
The bank-dealer partnership is strongest when both sides can communicate and collaborate to reach mutually beneficial agreements. After the collapses of Signature Bank and Silicon Valley Bank and the plummeting of other bank stocks in March, vetting banking partners is more critical than ever.
2. Maintain a line of credit that fits your operations
Accessing and maintaining a credit line is a recommended way to navigate rising interest rates, according to the ARA webinar. Lines of credit offer liquidity for emergencies and more flexibility than a traditional small business loan.
“Lines of credit are essential for liquidity, surprises, and the unexpected, so you need a line of credit,” Kassar said. “Think about it as an insurance process set for working capital seasonality and emergencies.”
Lines of credit become especially important in high-interest-rate environments because they provide emergency access to funds that would otherwise be too expensive, Kassar said. “You don’t want to be in an unexpected emergency and not have [lines of credit because] at that point, the cost of capital could be extremely risky in between having a straight line of credit and asset baseline.”
3. Refinancing current loans
Refinancing is not always the best option in the face of rising interest rates, but it can be a solution for dealers when liquidity is low and interest rates are expected to rise further, Kassar said. While many dealers focus on annual percentage rate (APR) when financing or refinancing, monthly payments are an important metric to consider when looking for funds, he added.
Most people looking at financing options heavily focus on paying the lowest APR. Kassar said. “While APR is important, in many cases, your monthly payment is more important, especially if there are no prepayment penalties on the back end.”
One refinancing avenue for dealers and rental and leasing companies is a Small Business Administration (SBA) loan. The size of SBA loans varies, but the additional years that come with SBA loans can help businesses navigate high-interest rates and debt.
“It often makes sense to use the SBA to refinance,” Kassar said. “I’ve seen SBA loans as small as $1,000. You can get up to $5 million partner buyouts, working capital and acquisitions, and up to $12.8 million for real estate equipment through the 504 [SBSA loan] program.”
Many businesses in the equipment industry meet the eligibility criteria for SBA loans and can get them through their banking partner of choice, he noted. For example, the size standard for equipment leasing and rental companies to be eligible for SBA loans is $40 million, according to the SBA’s table of small business size standards.