Do you know what most fire departments do to themselves that causes the most harm and wasted money when they finance their new truck? They fail to be completely honest with the bank.
Stop shooting yourself in the foot.
Most departments feel that the bank is the opponent and they withhold critical information in their bank discussions. For example, if the department plans on paying off their new truck in 3 years, they ask for a 5 year term and they never mention the 3 year plans. So, the department pays off the loan in 3 years and gets hit with a penalty or higher interest.
You gotta be honest or you'll get caught
If you don't feel that you can be 100% honest with the bank you're talking to, go find another bank. Then, disclose your entire financial plans and listen to the bank's advice. Just as you wouldn't hold back information from a doctor trying to help you, you shouldn't hold back information from your bank.
If the bank above had known the department would pay off the loan in 3 years, they could have offered an idea that did not include a penalty. And saved the department money and grief.
Summary
When you borrow money, you are entering into a long-term relationship. All successful relationships are built on a foundation of trust and honesty. Don't hold back any information! Tell the bank the whole truth and let them use their knowledge to help you.
Stay safe!
John R. Hill
Apparatus Budgeting Consultant
ENVIZION Financial
www.envizionfire.com
Wednesday, February 25, 2009
Wednesday, February 18, 2009
Fire Truck Financing: Does your fear cost you money?
I had a customer the other day that almost made a classic error which would have needlessly cost them over $25,000. Here's what they almost did.
The department was buying a truck and determined that a 5 year term was appropriate for their budget. After more discussion, the board thought that maybe they would choose a 10-year term instead to lower their payment.
They were concerned about their future revenues with the economy in trouble. They would plan on still paying extra each year. In other words, they would still pay the 5-year payment even though they were only required to pay the lower 10 -year payment.
Here's where they would have lost $25,000.
First, they would have had a higher interest rate. Interest rates for longer terms are usually much higher than shorter terms.
Second, while almost 100% of my customers talk about paying extra, only less than 2% actually do. It's easy to do, when the invoice comes in the mail, it's easy to just pay the minimum and use the extra funds for something else. You're not bad when you do this, you're normal!
Third, this department did not do a budget stress test. They worried if their budget was cut by 20%. When I analyzed their revenue, they could have a 44% decrease in revenues and still afford the higher payment. They did not know how to analyze their budget accurately.
Here's the solution I offered to save money and handle their fears
I advised the department to do the exact opposite of what they wanted. Instead of committing to a 10-year payment and the extra costs that would entail, I advised them to keep the 5-year payment.
They could afford the payment (at least for the next 3 budget years), keep the lower interest rate, and have the forced discipline of paying off the truck faster (5 years vs. 10 years). This saved them a lot of money.
I also advised them to negotiate with their bank that the bank would extend the terms in the future if their budget got dangerously tight. They felt comfortable in having a "Plan B" if money got tighter.
Summary
It's easy to make a mistake of emotion in the current economy. Use an independent Apparatus Budgeting Consultant to get clear-eyed advice and facts to choose the best financing option for your situation.
Stay safe!
John R. Hill
Apparatus Budgeting Consultant
ENVIZION Financial
www.envizionfire.com
The department was buying a truck and determined that a 5 year term was appropriate for their budget. After more discussion, the board thought that maybe they would choose a 10-year term instead to lower their payment.
They were concerned about their future revenues with the economy in trouble. They would plan on still paying extra each year. In other words, they would still pay the 5-year payment even though they were only required to pay the lower 10 -year payment.
Here's where they would have lost $25,000.
First, they would have had a higher interest rate. Interest rates for longer terms are usually much higher than shorter terms.
Second, while almost 100% of my customers talk about paying extra, only less than 2% actually do. It's easy to do, when the invoice comes in the mail, it's easy to just pay the minimum and use the extra funds for something else. You're not bad when you do this, you're normal!
Third, this department did not do a budget stress test. They worried if their budget was cut by 20%. When I analyzed their revenue, they could have a 44% decrease in revenues and still afford the higher payment. They did not know how to analyze their budget accurately.
Here's the solution I offered to save money and handle their fears
I advised the department to do the exact opposite of what they wanted. Instead of committing to a 10-year payment and the extra costs that would entail, I advised them to keep the 5-year payment.
They could afford the payment (at least for the next 3 budget years), keep the lower interest rate, and have the forced discipline of paying off the truck faster (5 years vs. 10 years). This saved them a lot of money.
I also advised them to negotiate with their bank that the bank would extend the terms in the future if their budget got dangerously tight. They felt comfortable in having a "Plan B" if money got tighter.
Summary
It's easy to make a mistake of emotion in the current economy. Use an independent Apparatus Budgeting Consultant to get clear-eyed advice and facts to choose the best financing option for your situation.
Stay safe!
John R. Hill
Apparatus Budgeting Consultant
ENVIZION Financial
www.envizionfire.com
Wednesday, February 11, 2009
Facts and fiction about fire apparatus lease purchase agreements
Is a lease purchase agreement the right financing method for your new apparatus?
If you need to borrow funds, a lease purchase agreement is probably the most cost-effective and flexible tool available.
Some facts about lease purchase agreements:
Summary
Don't get fooled by the misconceptions about lease purchase agreements. Most misconceptions come from the use of the word "lease" which is not used in the traditional sense. My article above provides a short history why the word lease is used.
Stay safe!
John R. Hill
Apparatus Budgeting Consultant
ENVIZION Financial
www.envizionfire.com
If you need to borrow funds, a lease purchase agreement is probably the most cost-effective and flexible tool available.
Some facts about lease purchase agreements:
- Lease purchase agreements are used by thousands of departments each year to finance apparatus.
- They are a time and legal-tested method to finance essential items such as fire apparatus.
- Volunteer fire departments can use lease purchase agreements to meet IRS rules to finance fire apparatus.
- They usually have little or no fees.
- They can be used in most states without the payment being considered debt and therefore be subject to debt limitations.
- They have very flexible terms.
- You own the truck with a lien on it just like a loan. Once you pay off, the lien is released from the title.
- You have to turn the apparatus into the bank after you complete the payments.
- You can't pay extra or pay off early.
- You never own the apparatus.
- They are not eligible for tax-exempt interest rates.
Summary
Don't get fooled by the misconceptions about lease purchase agreements. Most misconceptions come from the use of the word "lease" which is not used in the traditional sense. My article above provides a short history why the word lease is used.
Stay safe!
John R. Hill
Apparatus Budgeting Consultant
ENVIZION Financial
www.envizionfire.com
Wednesday, February 4, 2009
The new economics of fire apparatus purchasing
There is a storm brewing in the purchase of fire apparatus.
Apparatus prices have been increasing far faster than general inflation and department budgets over the past few years. Department budgets are under strain and, at best, hold steady. Most budgets include cuts.
These two trends are about to collide. How will it affect your department?
As these two trends continue, they charge toward an unsustainable future.
For your department, there are only 3 options:
Let's think through the implications of this a little more. If you need a truck to last longer or do more things, your design and spec process must incorporate more durability requirements. Ironically, that may mean even higher costs.
Summary
There is a balancing act to buying and affording apparatus in the current environment. Purchasing an apparatus requires more intentional thinking as the apparatus gets called to work longer or work harder.
Stay safe!
John R. Hill
Apparatus Budgeting Consultant
ENVIZION Financial
www.envizionfire.com
Apparatus prices have been increasing far faster than general inflation and department budgets over the past few years. Department budgets are under strain and, at best, hold steady. Most budgets include cuts.
These two trends are about to collide. How will it affect your department?
As these two trends continue, they charge toward an unsustainable future.
For your department, there are only 3 options:
- Convince your funding sources (taxpayers, governments, councils) to pay your department more to buy new apparatus, or
- Cut other department costs enough to afford a higher price apparatus, or
- Change the economic use of your apparatus.
Let's think through the implications of this a little more. If you need a truck to last longer or do more things, your design and spec process must incorporate more durability requirements. Ironically, that may mean even higher costs.
Summary
There is a balancing act to buying and affording apparatus in the current environment. Purchasing an apparatus requires more intentional thinking as the apparatus gets called to work longer or work harder.
Stay safe!
John R. Hill
Apparatus Budgeting Consultant
ENVIZION Financial
www.envizionfire.com
Subscribe to:
Posts (Atom)
