Where to Put Your Capital Now

Rates, Capital Investment Trends, and Borrowing Best Practices for a Slowing Economy

Before answering that question, let's look at the Federal Reserve Bank's recent activity with regard to interest rates, our primary means of countering one of the biggest of those challenges: inflation.

The Actions of the Fed

In 2022, the Fed raised its funds rate seven times, with the base rate for banks accessing capital from the Federal Reserve going from 0.25% to 4.25%, the fastest increase ever. That decision, while probably coming a bit late, was not taken lightly and not without a clear purpose: slowing the pace of the economy to curb inflation. Fed Chair Powell has been very direct in communicating there will be “some pain” ahead for the economy and that the Fed will use its “tools forcefully” to overcome inflationary challenges. In December 2022, Powell stated, “despite some promising trends, we still have a long way to go in restoring price stability.” Realistically, it can take six months or longer before the market feels the impact of a single rate increase. And we’ve had seven of them in a year, with more on the way.

The Potential Impact of Recent and Future Rate Hikes

Most businesses are either experiencing or about to experience these rate hikes in very tangible ways.

Here are a few key things to expect:

Lower Inflation That's why the Fed is taking us through the "pain" to begin with. As demand lessens, so do prices.

Higher Unemployment Labor costs remain elevated and headline-making staff cuts will likely continue.

Less Demand As the cost of borrowing continues to rise, a substantial number of businesses will step back, reevaluate, and plan to act when there's a better perceived cost/benefit ratio for borrowing.

Greater pressure on budgets With lower revenues, or at least slowing revenue growth, expenses must be evaluated accordingly.

Improved Access to Labor If there are fewer jobs available, competition increases for those jobs, and so does the quality of the applicants.

Increased Borrowing Cost When it costs banks and lenders more to access capital, it costs you more to access capital. Rates will climb throughout the first half of 2023 at minimum.

Controlling inflation is a must and a longer-term benefit to us all. Easing the labor shortage is another potential positive in the near term. But in the coming months there is no avoiding some disruption that feels less positive for most of us.

A final element to be aware of, is the length of time it takes for rate hikes to impact most in the economy.

If one rate hike takes six months to be felt, how do we know how many hikes were really needed and how much those hikes needed to be? We've raised rates so much, so quickly. Have we overcorrected? Time will tell, but building business resilience for the road ahead is paramount.

Capital Investment Trends Entering 2023

Where are companies investing capital and how are they borrowing to achieve their 2023 plans while managing these economic forces? In a recent survey of 7,129 executive business leaders, the following were the top six areas of planned capital investment in the coming year.

Product Line/Service Offering Improvement

Automation and/or Digital Transformation

Significant Equipment/Technololgy Additions

Efficiency Programs/Software/Practices

Product Line/Service Offering Expansion

Significant Equipment/Technololgy Infrastructure Upgrades

"We are hoping that slowing economic conditions will meet our attempts to automate and bring stability to labor and supply chain, while we continue to invest in targeted growth and improvement opportunities. Then we'll come out roaring when this is over."

The CEO of a Southeast US engineering and contract manufacturing company

A Few Takeaways From These Statistics:

Notice that improvements and efficiencies seem to be higher priorities than expansions or additions.

Companies are increasingly seeking technology solutions for growth and efficiency, even with the prospect of economic decline.

Rising rates have clearly made it less of a priority to add and expand technology and equipment, but these still remain in the top six.

Real estate acquisition, expansion, or remodeling is at a seven-year low and didn't make the top six – or the top fifteen, for that matter – for the first time since 2010.

Digital transformation and automation spending is the lowest since 2019 but still very high as companies seek technology to create efficiencies in the customer experience while reducing labor and operating costs.

Borrowing Best Practices

The businesses with the least access to flexible capital are the ones more likely to feel the pain promised by Chair Powell. For most mid-sized and smaller companies, it is essential to evaluate your relationships. Here are a few best practices:

LEAF Can Help

The team at LEAF has been through many economic cycles with our customers, and as a specialty lender for equipment, technology, and working capital for a wide variety of companies across the US, we stand ready to help you navigate the headwins. Whether you are seeking to fund an efficiency project, upgrade, improvement, or growth need, you can trust LEAF.

Speciality Relationships Matter

Preserve Cash and Cash Flow

Ensure you have relationships for working capital, equipment/ technology, projects...

Having a real estate lender that understands your type of need may lead to better...

This is important in all times but absolutely essential in times of decline. Leveraging low-cost...

Maximize Access to Capital

Talk to Your Lenders

Not doing so is perhaps the biggest mistake many businesses make. Proactive conversations...

Concentrate more on the benefit of the investment than the cost of capital to obtain it. Rates are rising everywhere, so focus on your cash flow and how the payments fit. Understand when your investment could start impacting your financial results and match that time horizon with the payment stream to begin calculating a cost/benefit and ROI. Remember, the most expensive capital is equity (your cash), and overreaction to higher rates might lead you to believe the opportunity is not worth the price. But even with rising rates, the ROI is often still there. That’s why nearly half of all businesses are still investing capital into decline.

Benefit of the Investment

LEAF Commercial Capital, Inc., a subsidiary of M&T Bank.

Terms and Conditions: All applications are subject to credit approval. LEAF finances equipment only for business purposes and not for personal, family, or household use.

Where and how are businesses investing capital in the face of today's economic challenges?

2022 Fed Rate Hikes

Benefit of the Investment

Concentrate more on the benefit of the investment than the cost of capital to obtain it. Rates are rising everywhere...

Talk to Your Lenders

Not doing so is perhaps the biggest mistake many businesses make. Proactive conversations...

Preserve Cash and Cash Flow

This is important in all times but absolutely essential in times of decline. Leveraging low-cost...

Speciality Relationships Matter

Having a real estate lender that understands your type of need may lead to better...

Not doing so is perhaps the biggest mistake many businesses make. Proactive conversations with your network of lenders about your challenges, concerns, opportunities, and vision can be the difference between their ability to fund against those issues or not. Bring your needs to the table and brainstorm. Get creative. Most businesses find this invaluable.

Talk to Your Lenders

This is important in all times but absolutely essential in times of decline. Leveraging low-cost, 100% financing debt is often preferable to sending cash out the door to invest in low-dollar but mission critical capital expenditures. Similarly, using your bank revolving line of credit to fund equipment/technology purchases may also lead to unnecessary cash and cash flow disruptions.

Preserve Cash and Cash Flow

Having a real estate lender that understands your type of need may lead to better overall terms. So can partnering with a working capital lender that can fund a project need without disrupting your primary line-of-credit relationship. Having maximum access to capital is often a function of seeking partners with deep experience in what you need and what you do.

Speciality Relationships Matter

Ensure you have relationships for working capital, equipment/technology, projects, acquisitions, and even real estate. This may mean working with multiple lenders, depending on your situation.

Maximize Access to Capital

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