I have a good friend in Denver that makes “hard equity” loans on commercial real estate – something like 50% loan to value and at fairly high rates. It’s a tool that investors and developers can use when they’re in a hurry or have a deal outside the scope of a bank. And he always looks the borrower in the eye as he charges 15% plus 4 points: “If you can’t make more than the cost of money I’m charging you, you shouldn’t borrow from me”. It’s not far from the words of the bard
While there are always needs that are regulatory or even emergency, calculating what that piece of equipment you’re eyeing earns you vs. what it costs you is a great first step. Many of you know I’m a big fan of Investopedia and their definition of hurdle rate is a great place for us all to start. It’s simple really and here’s an example:
Now this is a super simple view that ignores tax consequences such as depreciation or the deduction of lease payments; leverage; equipment salvage value and much more. The goal here is to give you a starting place. If the equipment you finance – net of finance costs – makes you more money than you put in the decision seems a good one for your situation.
So before the critics chime in with valid observations such as I’ve stated above in re: tax, salvage and more, just apply your first pass at this math when it’s time for that new gizmo and fine tune to suit your circumstances.