Basic Financing Principles When Buying A Fire Truck
At some point, every fire department has to buy a fire truck. And it doesn’t matter if your annual budget is a few thousand or several million dollars or if you are buying a used truck or a fleet of brand new trucks, the financial basics are all the same.
For all departments, buying a fire truck is a big deal. And with costs skyrocketing – for both used and new trucks – it’s essential to follow a few basic financial principles to make quality purchase decisions.
It’s easy to get so absorbed in the purchase details of the current truck that you overlook the fact that the purchase is part of a larger financial, operational and equipment plan.
Running a fire department requires a substantial amount of personnel and equipment to perform its essential function. Both cost money. Even volunteers require a financial commitment in the form of continued training and being properly and safely equipped. Add continued safety and performance improvements, and it’s easy to see that there is always an ongoing funding requirement in running a fire department.
The big picture should include a long-term view – perhaps 10 to 20 years. For this long-term plan, develop a reasonable projection of your truck replacement needs, staffing needs, equipment needs and housing needs. Make an estimated timeline of when you expect to replace a truck, add staff, purchase new equipment or build a new station. The point is to provide a guideline to show what you will need and when.
You may encounter pleasant surprises, such as the old tanker that lasted a couple of years longer than you thought, or unpleasant shockers, such as another truck that requires early replacement. But, regardless of the deviations from the plan, you’ll know how you compare and how to adapt to meet the overall objectives of your big picture projection.
This plan must eventually boil down to dollars and cents. Basically, it’s determining how much money you need at key points in the future. That way, you’ll be prepared to buy when you need to buy. If you plan on receiving grant funds, you’ll know when to apply. If you plan on asking your council for a financial commitment, you’ll know when and how much to request. If you plan on purchasing from savings, you’ll know how much you need to save.
The key is to impress the financial stakeholders in your department with your vision of a safe, well-managed department.
Setting A Budget
Each purchase must stand on its own without causing harm to the overall financial stability of the department. That means carefully deciding how much truck you can reasonably afford.
Your reasonable budget is based upon how much you have saved, how much you can borrow or how much you can receive from grants or a revenue increase. Your budget should factor in current pricing and, importantly, future price increases if you are planning a few years ahead. The cost of a new truck can easily increase by $20,000 or more each year. Many departments fail to include inflation in their budget and are shocked when the prices are tens of thousands of dollars higher than budgeted.
If you are planning on using savings, it’s important to keep a reasonable amount of rainy day funds – generally six months to two years of annual revenues – after the purchase for unexpected events.
If you need to borrow, know what you can reasonably afford. If you have future purchases, work within your big picture projections to set your repayment plan. A worse case scenario is when you need to replace a dangerous truck and cannot borrow the funds since your current loan has not been paid off. Develop a plan that allows you to afford both trucks without unnecessary pressure.
If you are seeking a grant or a revenue increase from your council or taxpayers, keep in mind the cost of inflation. It’s important to factor in the fact that a truck, which costs $300,000 today, may cost $350,000 by the time you receive the funds and actually buy it.
Most financial mistakes result from impulsive decisions. That means acting contrary to the budget you developed. While manufacturers will always have new and exciting options, it’s essential to stick within the budget and within the big picture plan. An impulsive purchase always leads to rash financial decisions that are not well thought out.
With trucks costing more than most people’s houses, manufacturers are creative in offering deals. They are usually complex financial offers disguised as discounts. That’s not to say that they are bad or good. It’s just important to understand their costs and the benefits. Then, make an informed decision based on your comfort level.
Many departments bid their financing the wrong way. Frequently they use bidding as a tool to learn what is available, rather than using the bid process to obtain the best financing term. If your budget requires that you finance some or all of your purchase, it’s key to separately analyze how you finance your truck and who will finance your truck.
Most departments lack the financial wherewithal to develop a specific financing plan. They simply have a hunch that a 5 or 10-year term or paying a down payment or not paying a down payment fits their budget. So, the bid request is for very general financing terms.
You wouldn’t bid your truck without analyzing the best configuration for your department. You ask questions and learn what works to determine the best truck specification. The same effort should be applied to learning about the best way to finance the truck. The cost of financing can equal up to half of the truck’s price tag.
Your analysis should be based in part on your big picture plan. What other replacements or purchases will be required during the financing term? Can you afford a second payment for these purchases? Or will you need to pay off this truck before you can buy another?
Your analysis should also include an examination of your purchase budget. Can you afford a down payment without shrinking your savings to a dangerous level? Can you afford a payment that will not jeopardize your next major purchase?
There are seven financing factors that determine exactly how much you’ll pay to borrow money. If your request for financing proposals doesn’t specify what you want for all seven factors, you’ll open yourself to confusing or misleading financial offers. Failure to determine exact financing specifications for your bid could cause you to overpay and may jeopardize future plans.
After you’ve spent the time determining the exact requirements you need for all seven financing factors, then bid your financing with exact financial specifications. You’ll get better, clearer offers and will have an easier time deciding who should finance your truck.
Seven financing factors determine how much you’ll pay to borrow money:
1. How much you borrow. If you have money saved up with no specific purpose, you’re losing money by not making a down payment on your truck.
2. How long you borrow. If you borrow for a shorter period of time, you save a lot of money. This single factor has the largest influence on how much interest you’ll pay.
3. Payment timing. It matters when you make your payments during the budget year. On a $250,000 truck, moving your payment up by 6 months will save you over $6,000.
4. Payment frequency. The old rule is by paying monthly you pay less interest than quarterly or annually. That’s not necessarily true for fire apparatus. Get help to analyze the best frequency.
5. Fees and costs. By law, they are not included in your interest rate. So, you may get a low rate, but after adding in the fees and costs, the real interest rate is higher.
6. Terms and conditions. Don’t forget to read the fine print. Hidden charges, such as prepayment penalties, can dramatically add to your total borrowing cost.
7. Interest rate. Your interest rate influences how much you pay, but the other factors will cost you more than negotiating a 1/4 percent cheaper interest rate.
Editor’s Note: John R. Hill, an apparatus budgeting consultant, is president of ENVIZION Financial and a nationally-recognized speaker and author regarding the issues of buying and financing fire apparatus. He lives in Indianapolis and is working on a book about how fire departments can strengthen their financial condition.