Are you prepared to protect yourself from disaster when prepaying a fire truck? This article provides a step-by-step process to follow.
What's the absolute worst thing that can happen when you prepay your fire truck? You give several hundred thousands dollars to a manufacturer who then goes bankrupt. You're out the money and out a new truck. It could set your fire department fleet replacement plans back years or even decades. It's happened to other fire departments. Don't let it happen to you.
To protect yourself, do the math and your homework.
First, do the math:
Is the prepayment a good financial deal? Believe it or not, those big discounts sometimes actually cost you money. It helps to avoid the problem if you can learn that the discount isn't that great of a deal. To learn more about how to measure if the discount is a good deal or not (for more information about analyzing prepayment discounts, see article: Fire Truck Prepayments: Is! it a good deal?).
A word of caution here: Companies that are about to go bankrupt are desperate. Most likely, their discount will be big. So, financially, the discount will make sense. Here's an easy way to get a feel about the financial status of the manufacturer. Tell them you're not interested in prepaying and see what they say. My experience is that the manufacturer will not let it go. It needs your money to finance its back log of trucks. That's what companies about to go bankrupt have to do. Check your gut about their reaction. Are they anxious to talk you into prepaying? Even increasing their prepayment? Won't let it go? All bad signs.
Second, after the math, do some homework:
It pays to review the financial ability of the manufacturer and here's 2 ways to do just that:
Ask for and review the financial statements of the manufacturer. If they provide the financial statements, have a professional (like a banker or accoun! tant) review them.
Ask for their costs of providing a pe! rformanc e bond and compare them to other manufacturers. Bonding companies base their costs on the financial strength of the manufacturer. The higher the cost, the higher the risk. At the time of this article, most manufacturers have bonding costs from about $3 (very strong financially) to about $10 (very weak).
Third, require a performance bond:
A performance bond is an insurance policy that your truck will be built or that you will get your money back if the manufacturer does not build your fire truck (or "performs"). The bond should cover the total amount of the contract.
Some wisdom from experience here: Don't expect that collecting on a performance bond will be an easy or fun experience or that you will have no problems because you have a performance bond. The bonding company will not build your new fire truck. That's not their business. They'll write you a check for you to get a new truck from another manufacturer. Beware, the bonding company is an insurance company and will drag out your payment (that's how they make their money). Also, they will only pay for the limit of their bond or the amount of money you lose, whichever is less.
Also, after you get your check, you'll approach other manufacturers to now build their truck. YOUR PRICE WILL ! BE HIGHER. And that won't be covered by the bond. So, if you think that you won't be out of money because you have a bond, you're wrong. You'll end up paying tens of thousands of dollars more for the same truck --- and that won't be covered by the performance bond.
Finally, do some more homework:
After all the above, you still have one more thing to do. You must review the financial strength of the bonding company.
There is a company called A.M. Best (www.ambest.com) that reviews the financial strength of insurance/bonding companies. You can use their website to get the "Best rating" A rating of B+ of higher means you have a financially secure bonding company.
Why all this work?
It takes a lot of effort to protect your self from losing hundreds of thousands of dollars. By skipping one step, you may put your department in financial and operational jeopardy.
If you don't feel you have the skills to handle these steps, call me toll-fr! ee at (877) 368-4946.
Stay safe! John Hill, Apparatus ! Budgetin g Consultant
Envizion Financial
Toll-free (877) 368-4946
Go to http://www.envizionfire.com/purchaseAnalysis.php to see me in action.
Go to http://firefinanceexpert.blogspot.com/ for stories about fire department finances
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