Why Finance in a High-Rate Environment?

I climbed a mountain in the Smokies last month, reaching the peak at 6,594 feet. By the time this article is published, I’ll hopefully have completed hiking my first two 14ers in the Rocky Mountains (mountain tops above 14,000’). So is my climb in the Rockies that much more difficult, or does the challenge depend on distance and the field elevation at the start of the climb? 

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Many people are contemplating how higher interest rates today (compared to the past decade but much closer to long-term historical averages) will affect business and whether customers choose to finance. Higher rates will definitely require a harder look at how one deploys their cash. Just as a mountain's summit elevation doesn't tell the whole story, the stated interest rate alone shouldn't determine whether financing makes sense.

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When purchasing a strategic asset like an aircraft (or any large piece of equipment, for that matter) and deciding whether to finance, regardless of the interest rate environment, one should ask about the opportunity cost of deploying their cash elsewhere. The question isn't simply, "What will this loan cost me?" But rather, "What return could that capital generate elsewhere?"

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Customers have told me they’re making 10, 12, 15, sometimes 20% on the cash they invest into their businesses. If this is the case and cash is parked in an asset, one could be missing out on larger returns elsewhere.

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Or perhaps there’s a large liquidity event like a sale of a business, property, or stock in the foreseeable future. Deploying money in an all-cash purchase may not be available or could substantially deplete the company’s working capital. 

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Financing doesn’t have to always be a traditional 80-85% advance. Lower LTVs could make the most sense in these scenarios. A good aircraft lender should be able to structure financing to fit a customer’s cash flow, liquidity needs, and capital events. 

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So just because the Rockies offer higher mountain tops doesn’t mean it’s a more impressive hike. In fact, my climb in the Smokies does indeed have more elevation gain and a longer distance hike than the Rockies. The headline of higher interest rates doesn’t take financing off the table either; it just makes one take a harder look at where the best use of their capital should be. As for the better hike, we’ll let the pictures be the judge. 

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