Wednesday, May 27, 2015

Fire Truck Leasing - Things that matter #2

What's the first thing you ask when leasing a new fire truck?  What's the rate?

The rate is important but there are other things that are also important.  This series will help you understand and ask about all the things that matter.

Why do I have to pay that?

I have talked with departments who must pay every penny of interest even if they want to pay early.  Other departments have to pay a huge fee to get a balance.  For others, they can't pay off early until a certain date in the future which means they have to pay interest for money they don't really need.

How do these departments get into these and other similar situations?

Things that matter #2 - Terms and conditions

Financing contracts are complex and wordy.  And if you don't understand the terms and conditions of the contract you are signing, you may be surprised at what you agreed to do.  There are some lenders out there that prey upon the inexperienced.  You get hooked by a low rate but find out that you are liable for many other costs and charges.

Summary

Read the fine print.  If you don't understand it, get someone who can.  It's a smart decision that will protect your department.  You'll save yourself a lot of potential grief later.

Stay safe!
John R. Hill
President
First Bankers

Wednesday, May 20, 2015

Fire Truck Leasing - Things that matter #1

What's the first thing you ask when leasing a new fire truck?  What's the rate?

The rate is important but there are other things that are also important.  This series will help you understand and ask about all the things that matter.

How can a 0% interest rate be a bad deal?

I received a call a couple of weeks ago from a department that needed a new truck.  The last truck they bought was 16 years ago and it needed to be replaced due to increasingly costly repairs.

Here's the deal:  The Department received a 0%, 25 year year loan on that truck. So, even though the truck is no longer useful, they still owe money on it. They are in a situation where they can't afford to replace their truck.

Things that matter #1 - The term

The term, which means how long you are repaying the loan, is important.  It should be selected based on  your payment budget, the expected useful life of the fire truck, and future purchases.

Summary

Even a 0% rate can be a bad deal.  That's why choosing the right term is something that matters.


Stay safe!
John R. Hill
President
First Bankers

Wednesday, May 13, 2015

Fire Truck Performance Bonds

If you are prepaying a fire truck (see last week's article here), a performance bond is essential to financially protect your department. 

And with a spate of recent manufacturer failures and rumors about the financial viability of other fire truck manufacturers, a bond can help you avoid a major financial catastrophe. 

So, what is a performance bond?

A performance bond is an insurance policy that pays out if your fire truck manufacturer fails to perform in completing construction of your fire truck.

How does it protect your fire department?

A bonding company will write your fire department a check in the event your manufacturer goes bankrupt, out of business, or otherwise is unable to manufacture a fire truck. In other words, the manufacturer is not able to perform its requirements under a fire truck contract.

What should you know about performance bonds?

There are still risks even though you have a performance bond.  A bond has a set limit and the bonding company will only write a check up to the maximum of the bond.  The replacement truck may cost more than the original, failed truck and your department could be liable for this higher cost.  Finally, a bonding company may be financially unstable and be unable to honor its bond commitment.

Summary

A performance bond is highly recommended to protect your department when you prepay your fire truck.  But a performance bond is not a silver bullet and your department may still have risks.

Stay safe!
John R. Hill
President
First Bankers

Wednesday, May 6, 2015

Fire Truck Prepayment Discounts

Your sales person offered you a discount to prepay the truck.  Should you take it?

The answer is maybe or maybe not.  The key is to understand the financial and non-financial risks and make an informed decision.

So, how should you analyze a prepayment discount?

 

First, the financial costs and benefits.

Determine what money you lose (or pay) by prepaying the truck.  
Are you drawing from savings?  How much interest income will you lose during the construction?

Are you financing?  How much interest will you pay to earn the discount?

Then, compare how much you pay (or lose) against the amount of the discount.   Is the difference large enough to prepay?

Second, the non-financial costs and benefits.

What is the financial stability of the manufacturer?  After all, you are investing in them by lending them money to build your truck.  That's why they pay you a discount.  It's interest on what you are loaning them. Or, what control do you lose when the manufacturer has your money and your truck.  What is your leverage?  Do you have confidence in the manufacturer's integrity to perform on-time?

Summary

Prepayment discounts always seem like a big number... until you think about what is actually happening.  There is risk and reward and the savvy departments measure both before making the decision.



Stay safe!
John R. Hill
President
First Bankers