The Secrets to Ambulance Financing: What to watch for & watch out for

 

 
 
 

Dale Leich | From the April 2008 Issue | Monday, November 17, 2008


For any EMS organization that provides transportation, its most important "tool" will be the ambulance. It's used on every response and must provide reliable, cost-effective service for years. And except for buildings, it's usually the single most expensive purchase a service provider will make. Proper financial planning can provide an opportunity to invest in a better value for the same budget allocation, creating a vehicle that your staff will be proud to use.

The Most 'Bang' for Your Buck
At some point, your organization will determine that it needs a new ambulance (or maybe several). Various models will be reviewed and a set of requirements established. You may find yourselves trying to design the ˙ultimateÓ ambulance, which will usually exceed the planned budget.

To maintain balance as part of the design process, vehicle specifications should include the "must have" features that form your minimum requirements. Remember that as the organization creates this list, any customizing (e.g., special interior cabinets) will result in additional manufacturing costs. So study available floor plans from each vendor; some offer a wider variety of acceptable styles.

When soliciting formal pricing from vendors, your specifications should require itemized pricing for every optional cost item they must add to their base model to meet your specific design requirements. What may be considered a standard feature for one vendor may be an upgrade option for others. This creates a wide range in pricing among vendors.

With software quoting packages available to all vendors, this is a simple process, but some may resist your efforts to evaluate individual option pricing. You'll need to have a clear understanding of those cost differences for each item as part of your vendor evaluation process to ensure you know what you're being offered (and what you're not).

I'm still surprised when I review ambulance bids and find vendors have overlooked, ignored or otherwise not included specific items requested by the client, thus making their overall bid price appear to be less. An exhaustive review of all bid documents should be performed to reveal these "errors."

It's also wise to include a list of potential options to be considered with the specifications for each vendor to individually price, such as upgrading to LED warning lights or adding a rear-view camera system. A cost/benefit analysis of these extra items will allow you to consider them based on your remaining budget after the minimum vehicle requirements have been satisfied.

If you need to add new equipment to the vehicle (e.g., a cot, a defibrillator or two-way radios), contact those specific vendors individually and negotiate your best pricing for the exact items. Provide copies of those current quotes with the bid-request documents provided to each ambulance vendor so those items are included in their proposals. You can then be reassured each vehicle proposal includes the exact items you need without confusion or omissions by the vendor. This strategy is particularly suitable when the vehicle and related equipment are being funded as a single purchase package.

Paying for It
If you have an older vehicle as a trade-in toward the new vehicle, have the trade-in offer listed individually in your bid-request documents. Trade-in pricing tends to become more realistic versus an overall inclusive price for the new vehicle when the trade-in price is a separate item. Remember that potential buyers place a different value on used vehicles, so don't be disappointed by vendors' offers on your 12-year-old ambulance with 200,000 miles. You may find it financially advantageous to offer the used vehicle for sale through local outlets or Internet bid sites.

Depending on how your organization is established (i.e., tax-supported, hospital, volunteer, non-profit, for-profit), you might have various sources of funding available to help finance the purchase. Most departments aren't lucky enough to obtain a grant or receive a gift from a local community supporter to replace an entire vehicle. So the traditional payment method is to simply pay cash at the time of delivery. This is accomplished via tax revenue, fund-raising, contract payments, patient revenue, established vehicle depreciation funds or interest-bearing savings accounts (as your state laws allow).

For many EMS agencies, it usually means a yearly budget process that requires forecasting a year (or more) in advance to get funding approval. Cash is used for the purchase if and when the funds actually become available. In some communities, capital equipment purchases can be delayed for part of the fiscal year until sufficient revenue has been collected to satisfy operational budgets (such as payroll or utilities) or investment notes have matured. If you're not subject to restrictions, it's best to have your bid documents ready to be issued to vendors as soon as the fiscal year is effective. Waiting too long to purchase your ambulance leaves you at the mercy of increased material costs, chassis costs, etc., that erode the buying power of your approved budget.

If you don't have sufficient funds available to pay in cash, remember that financing (no matter the method) is simply negotiating the cost of money you want to use. Eligible non-profit organizations might find a local bank will offer a low-interest (or no-interest) loan and decide to ˙write offÓ their normal profits on the loan as a tax-deductible donation to your organization.

It may be helpful to have your organization's accounts at the same bank to show your loyalty to their institution. However, understand that in this age of large multi-state banking groups, some local loan officials may not be able to approve ambulance financing due to bank policies.

When choosing a bank, also keep in mind that your local government and hospitals routinely make large on-going purchases; they may already have pre-negotiated loan (or lease) approvals in place with preferred banks to expedite the process.

Chassis manufacturers are also a good financing source. Most companies can offer competitive rates for the entire vehicle. They want your business because they have an interest in selling you their chassis and can establish a payment plan to suit your agency's cash flow. If you plan on selecting a local dealer to provide the chassis, this may be a practical alternative to pursue.

Leasing Options
Leasing can sometimes be a valuable financial tool to consider. Suppose your agency needs to assume coverage when a neighboringEMS agency closes with little notice. Maybe a new service contract or municipal annexation just enlarged your response area and will require additional vehicles to handle the responses. Or say the maintenance shop or station burns to the ground overnight and destroys one (or more) of the ambulances in your fleet. Or, more typically, what about a vehicle destroyed in a crash? Some may rely on an insurance settlement (with sufficient replacement value coverage), but what happens when the organization is self-insured for the loss?

Most organizations don't have a large reserve fund that can be used to fund new vehicles in these situations. Many months of waiting may pass before a new fiscal year budget is approved or sufficient funds are available to purchase a replacement. For the same cost of purchasing a new vehicle, you can use your budgeted funds to lease multiple vehicles and update your aging fleet, saving money on maintenance in the long run.

There are actually two distinct methods of leasing, each having specific features. You should consider which best suits your needs.

Operating lease: This open-ended lease allows your organization to make periodic payments and then consider the option of purchasing the vehicle at the end of the lease period for a single lump payment (usually established at 10% to 20%ƒsometimes called residual value). Otherwise, the vehicle is returned to the leasing firm, and you may have to obtain another replacement vehicle to continue operations.

Although this method may be useful in some situations (such as limited-duration contracts), organizations that use this method may find themselves accountable for excess mileage surcharges, unusual wear-and-tear expenses, and other unplanned fees that may total more than the remaining value of the vehicle. Some agencies have discovered this problem the hard way. Any equipment included with the vehicle would also need to be returned if they weren't included in a separate payment schedule.

Capital lease: This is a closed-end lease that allows an organization to make periodic payments and then own the vehicle for a token amount (usually $1) at the end of the defined lease period. If you want to invest in a better quality vehicle that has a longer service life, this method is especially valuable. It's also useful if additional equipment is included with the vehicle because those items also share a lifespan of several years. For a modular-style vehicle, you can then take advantage of remounting the module onto a new chassis when the current chassis is no longer economically feasible to repair, thus saving more money over time. The entire remount process can be funded with a similar lease agreement.

Structuring a Lease
Once a final price is determined, a lease can be created to provide a customized payment schedule that best suits your organization's financial requirements. A review of your organization's finances is typically required for most large lease amounts. The complexity of the review and threshold amounts depend on limits established by the leasing vendorƒmany have easy application documents to speed up the process. They need to ensure your organization has sufficient income to meet the planned payment schedule and its other routine financial obligations.

Someone within your organization must ensure the lease payments are made on time, which can be a problem if the payment book is misplaced or locked away and forgotten. It's best to have your accountant or bookkeeper retain these items in a secure location so they can make the payments on schedule.

In addition to staying on schedule with payments, you must also ensure you're getting a fair interest rate. Interest rate is calculated by answering many questions, including:

> Which type of lease is it? Operating or capital?

> What's the total cost of all items?

> Is there any prepayment that reduces the total amount paid for the entire lease?

> Will the first payment be due at time of delivery of the vehicle or delayed? (Some vendors allow up to 18 months after delivery before the first payment is due. The interest rate is slightly higher for a delayed payment schedule because the leasing firm is going to pay the vendors at time of delivery so they need to cover their costs.)

> How long will the lease be in effect? Three or four years? (Some firms offer longer terms depending on the brand or style of vehicleƒespecially with an operating lease because higher quality models have better residual value. Rescue trucks can have even longer terms.)

> How often will payments be made? Monthly, quarterly, semi-annually or annually? (This may require input from your organization's financial advisor to determine a suitable payment schedule.)

> Is your organization considering financing several new projects (such as a vehicle, building addition and new computer system) at the same time? (These projects can be combined or even refinanced to create a single loan package that creates a lower interest rate for the total amount.)

Evaluating Leasing Proposals
Here are a few points to keep in mind when evaluating leasing proposals from companies:

Some vehicle manufacturers offer direct financing or leasing through one of their subsidiaries. Some may "sell" your lease to another firm after you have negotiated the lease, which can result in a potential change in terms, conditions or payment schedule. Ask if they ever "reassign" their leases to another party.

Compare leasing options offered by ambulance vendors versus independent leasing firms. Ambulance vendors may receive residual considerations from firms they suggest in their bid proposals, resulting in additional income from the original vehicle sale at your expense. Be alert to leasing firms that attempt to steer you toward one specific ambulance vendor in order to "seal the deal." They may have a hidden financial relationship with that vendor. Reputable leasing firms will underwrite the brands and vendors you designate.

Beware of artificially low teaser rates initially provided at the time of the vehicle quote that may not be honored near the time of delivery. Obtain a formal quote in writing by an officer of the leasing firm and have it reviewed by your legal advisor. Remember that any quoted rate is subject to change if the creditworthiness of your organization isn't sufficient to sustain the original rate quotation.

Some leasing firms specialize only in tax-exempt municipal leasesƒand your organization may not qualify. Ask them for specific requirements and referrals to other leasing firms that can help you.

Determine if early payments are acceptable without penalties. Additional revenue may allow you to pay off the lease early.

Conclusion
Many EMS organizations struggle to find sufficient funding to maintain daily operations. It becomes even more difficult to develop funding for new equipment purchases or to maintain a planned equipment replacement schedule. Consideration of non-traditional funding methods can provide significant upgrades to your fleet and equipment at little additional cost. Minimize the cost and maximize the value, and you'll be sure to get an ambulance that satisfies everyone in your agency.

Dale Leich is the special projects manager for EXCELLANCE Inc. of Madison, Ala. He had a career spanning three decades in emergency services as a firefighter, paramedic and EMS administrator. He has been involved in emergency-vehicle purchasing and sales since 1975.




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Related Topics: Administration and Leadership, Vehicle Ops, Jems Features

 
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