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Why is investment in CapEx growing despite rising interest rates? Alan Sikora, CEO of First American Equipment Finance, shares his perspective.
The Current State of CapEx
As the Federal Reserve continues its efforts to slow the economy and fight inflation, it is not surprising that rates are expected to remain high throughout 2023. What may come as a surprise, however, is that despite elevated interest rates, investment in CapEx—and financing investment in CapEx—is on the rise as well.
According to the latest ELFA Monthly Leasing and Finance Index (MLFI-25), which reports economic activity from 25 companies representing a cross-section of the $1 trillion equipment finance sector, new business volume of commercial equipment financed in January 2023 was up 6% (at $8.8 billion) compared to January 2022—far outpacing GDP growth.
Increased financing of capital expenditures might be the opposite of what is expected in these economic conditions, at least by historical standards. Typically, higher cost of capital leads to a cool down of CapEx and subsequent decrease in commercial leasing and financing. So, what makes our current environment different? Here are a few observations from the past year and implications for the year ahead:
Pent-up Demand Opens the CapEx Floodgates
Major supply chain disruptions and their resulting shortages forced businesses to delay or freeze their capital projects in 2020–2021. Though supply chain issues are ongoing, they are less severe now. This, combined with the pent-up demand from the past few years, led to a significant resurgence in capital spending as the economy reopened—which has steadily continued.
Anticipated Rate Increases = More Fixed-Rate Financing
Throughout 2022 and already in 2023, companies sought out fixed-rate financing with the expectation that rates would be higher in the not-so-distant future. By utilizing fixed-rate financing for equipment acquisitions, business leaders can minimize their initial cash outlays, gain needed predictability for cash flow management, and align payments with expected cash inflows.
Labor Shortages Leading to Automation
The labor shortage across the country has persisted for many companies and is not expected to ease soon. To address this void, businesses have turned to automation—substantially increasing their investment in robotics and automation technologies to support their existing workforce, lower operational costs, and create needed efficiencies to meet demand. And we can expect this to remain a strategic priority in the years ahead: according to research by Interact Analysis, investment in automation is slated to grow from $29 billion (2020) to $67 billion in 2025.
Financial Executives Diversifying Funding Sources
With a recession looming, relying on an established banking relationship as a single source of funding is too risky for some businesses. Many are getting ahead of potential changes in their bank’s business by exploring other financing relationships to complement their main bank.
Both the past year and year ahead present an interesting and unprecedented intersection of inflation, labor shortages, and supply chain constraints. Yet despite these economic headwinds, investment in capital projects has risen and will likely continue to grow in the coming years. By investing in CapEx and using financing as a strategic tool, business leaders can build financial resilience and position themselves to take advantage of growth opportunities on the horizon.
Meet the Author
Alan Sikora
Chief Executive Officer, First American Equipment Finance
Alan Sikora is the chief executive officer of First American Equipment Finance, one of largest equipment finance companies in the U.S. backed by the strength of City National Bank and RBC. He is also a member of City National Bank’s Executive Council.
Alan joined First American in 2002 and has held various roles in credit, operations, and sales leadership. He has been the CEO of First American since 2015. In his role, he is responsible for the strategic direction of First American, one of the 20 largest bank-owned equipment finance businesses in the U.S.
