Regarding commodity prices, all signs are pointing up and this inflation presents several challenges for businesses. Aggressive government money printing, historically low interest rates and supply chain issues all mix with pent-up consumer demand caused by shutdowns to set the stage for a bumpy short to medium term road ahead.
For example, consider the purchase of new equipment for your business:
The price now is at $200,000
With 3% inflation the price is $206,000
Add another 3% inflation and the price is $212,180
This is now a 12% difference in price. What might seem like small numbers adds up fast as the compounding of inflation can be as fast as the compounding of interest.
Here is how can you hedge against this kind of price inflation:
1. Buy Low: Buying equipment today will cost you less than the same equipment tomorrow. How you pay for it also has an effect on how much it costs, but all else being equal, if inflation holds true, you will be paying less for the asset today than tomorrow.
2. Buy more: putting down a large sum of cash in the form of a purchase means you are missing out on a leverage opportunity to grow your business. A dollar you have today is worth more than tomorrow’s dollar. Leasing allows you to borrow in todays dollars and pay with tomorrow’s less valuable dollars. By leasing you are hedging inevitable increase in price due to inflation and keeping your cash where it can help you get more opportunities, more equipment working for you and more stable cashflow.
3. Lock in a low rate: unlike lines of credit and variable rate loans, leases are fixed payments that lock in today’s low interest rates for whatever term works best for your business. Lock in today’s historically low rates for 2 to 8 years and have the same predictable payment over that period. Rising inflation and interest rates could erode margins and even feasibility for new equipment purchases.
Inflation risk is seeming more likely due to world events. If revenue and costs rise at a similar rate, then you may not notice your margins change at all, but if your revenue goes down, or stays the same, and your costs go up you could be in a lot of trouble. With a little hedging strategy, you can take the sting out of normal to high inflation periods and your business can come through stronger than ever.
If you are considering growing or changing up your equipment base, then now may be the time to act and lock in pricing. Should you decide to work with Patron West our credit pre-approvals are good for up to 90 days giving you time to find the best deals.
