Do you know how to protect yourself from a financial problem with your fire truck manufacturer?
There has been lots of bad news for the fire apparatus manufacturers lately. One large manufacturer went bankrupt and closed its main factory. Another was sold for pennies on the dollar. The largest has its credit rating downgraded further into “junk bond” status. Several smaller manufacturers have just vanished – with the horror story of departments who pre-paid hundreds of thousand of dollars left behind with nothing to show.
With the economy today is such shaky condition, it’s unlikely that that the fire apparatus manufacturers will turn around quickly.
So, what can you do to protect yourself from a financial disaster with your manufacturer?
Here are the basic steps to protect yourself when making this large financial and important purchase.
- Be prepared that, no matter what, you can lose money if your manufacturer fails during construction of your new truck.
- Analyze deeply before you pre-pay for a truck or chassis prior to delivery.
- Analyze very deeply before you enter into a complicated financial transaction such as a trade-in or turn-in lease with a manufacturer.
- Take firm and “bullet-proof” steps to protect your money.
We’ll look at each of these in more detail below.
Be prepared that, no matter what, you can lose money if your manufacturer fails during construction of your new truck
If your manufacturer fails during construction of your truck, you will lose money. The reason is that you’ll be forced to sign a contract a year or later than when you first selected and budgeted for the truck. Most certainly, the cost of the replacement truck will be much higher. Today, the average price of the average truck goes up about $18,000 each year. So, you may be forced to buy a replacement truck that is $18,000 or more higher.
If you paid for the chassis upon delivery and the manufacturer fails, you own the chassis and will have to negotiate with another manufacturer to build on that chassis. They will charge you more since those situations always have manufacturing problems. The new manufacturer will charge you more because building on someone else’s chassis is always a hassle.
Your chances at losing money increase greatly if you enter into a complex financial transaction with the manufacturer. The following two points discuss what to do in these situations.
Analyze deeply before you pre-pay for a truck or chassis prior to delivery
When you give money to a manufacturer before you take delivery of your truck, you are lending money to the manufacturer. No matter what you call it. You are giving them money with the promise they will give you something back later. That is what lending money is.
It’s easy to get swayed by a discount worth tens of thousands of dollars. It seems simple and easy. You pay a lower price for the truck. But you must measure what you are giving up to get that discount. Is your money in a saving account? Or will you have to borrow money to pre-pay the truck? Either way, you are losing interest or paying interest to gain that discount. The formula is to understand if what you lose or pay is more or less than what you gain.
Second, if you pre-pay your truck and your manufacturer fails (such as files bankruptcy), you become a General Unsecured Creditor in the bankruptcy. That is the last person to get paid. So, you must measure your risk and your tolerance for that risk. That’s a fancy way of saying “How much money am I willing to lose?”
The key here is to understand exactly what is the worse that can happen and then if you can afford the worse.
Analyze very deeply before you enter into a complicated financial transaction such as a trade-in or turn-in lease with a manufacturer
The popular trade-in or turn-in lease is a very complicated financial transaction with lots of fine print and clauses that can cost you a ton of money if you don’t understand them. These risks can be even higher if the manufacturer you are contracting with is on shaky financial ground.
The key question is “What happens if the manufacturer is not around in 5 or 7 years to trade my truck back?”. There are several other questions to ask:
- What are my options if I can’t turn my truck back?
- How much must I pay if I want the truck?
- Who will I negotiate with at the end of the lease term?
When you enter into a contract like this, you are getting more financially intertwined with the manufacturer than just buying the truck and depending on them for warranty and service. Your use and ownership of the truck can be thrust into bankruptcy if the manufacturer fails.
Take firm and “bullet-proof” steps to protect your money
The best way to protect yourself is to require the manufacturer to bond the contract and their performance. All financially solvent manufacturers should be able to provide bonds to cover your financial risk in doing business with them.
If you want to know how one manufacturer financially stacks up against another, request each manufacturer’s performance bond costs. The higher the cost, the higher the risk.
The manufacturer will charge you, whether you see the specific charge or not, for this bonding. This is a small cost to prevent a large financial problem later on. It’s always easy to know that you needed more insurance after the fire. The key is to properly protect yourself before the tragedy happens.
Also, unless you can shoulder a higher cost for another manufacturer to build your replacement truck, get a bond amount that covers the replacement cost of the truck. That’s because you’ll be pricing a replacement truck a year or sometimes even later than when you first budgeted. The price will go up.
Or, if you paid for a chassis, make sure you get ownership information for the chassis. This document is called a Certificate of Origin (C of O) and is issued by the manufacturer of the chassis.. If you pay for the chassis, insist on receiving this very shortly after you pay. If the manufacturer gives you the C of O, that means they have paid their bills – in this case, the chassis manufacturer. You won’t get in the middle of any payment disputes between the chassis builder and the manufacturer.
It also means that, in the bankruptcy, you have proof to show the bankruptcy court that you are the legal owner of the chassis and you won’t have a complex legal fight to get the chassis you paid for.
Don’t let the current financial environment scare you into delaying an important apparatus purchase for your department. If you understand what risks you are potentially taking and taking active steps to protect yourself, you should navigate these financial rapids without undue risk or stress.