Most fire departments don’t know that their request for fire truck financing proposals actually set themselves up to receive less bidders, create more confusion for themselves, and get worse financing terms. This article will help guide your fire department to set up a successful RFP process.
First, the RFP is not the time to shop for knowledge.
Too often, fire departments send out RFP requests without knowing what they exactly want. So, they effectively use RFP process to shop for information about lenders’ offerings. In other words, your fire department sends our RFP that asks for some very basic terms such as interest rate for a 10 year loan. Your department decided on a 10 year loan because of a general feeling that should be the term. The lenders reply and offer only the interest rate. This is the first step where you start getting a bad deal.
Here’s why. There are 7 factors that control how much you pay when borrowing money. When you send out a RFP based on the basic information above, you are opening yourself to those lenders who understand that they can present a low rate but overcharge you on the other 6 factors. Often, this low rate is calculated on an alternative interest rate formula which, although legal, is inconsistent with the most popular method of calculating rate. You won’t even know that you are being overcharged until after you sign the contract.
Second, determine what you really want.
If you don’t have the department resource who truly understands fire truck financing, find a trustworthy and knowledgeable person who can help you understand exactly what financing terms you want. This person should not be someone who will be bidding later so you have an objective source of help. They should help you set a general payment budget, what terms or restrictions you are willing to undertake, and financing term. By using this information, you will then be able to use the RFP process for its correct use – getting the best deal – rather than fact finding current financing options.
Your bid will be concise and provide a fair opportunity for lenders to present their best options. When lenders see a general RFP, they know that there are sharks who play bidding games. So, they don’t bid and your department ends up with fewer bidders and higher overall borrowing costs.
Finally, specifically ask for the right financing terms.
When you ask for the right information in the RFP, all lenders know you have set up a level playing field that they have a chance to win. So, more lenders respond to your RFP. And they work harder because they feel they have a fair chance to win. You’ll get overall better proposals.
There are 7 specific items you want your bidders to include in their proposal. When you ask for these 7 items, you will get more proposals, and better proposals, and you will also get information that is presented uniformly. That means you will have a far easier job in comparing the proposals since they will be “apple to apple”. Otherwise, you will end up with a wide variety of proposals that seem to have no relation to each other. Your job in comparing them will be harder, you will miss key cost factors, and you’ll be more susceptible to the game players and less likely to know what the best proposal is.
The 7 factors are:
How much you want to borrow
How many years you want to pay back the loan.
The date of your first payment (specify a date)
How frequently you want to make payments (monthly, annually, etc.)
Details of any fees or costs at any time during the financing term (this means not just “origination fees” or costs which are charged at the beginning but any fee or cost whatsoever such as prepayment fees or lien release fees or balance verification fees, etc.)
Interest rate and how it is calculated and how long the rate is fixed
Payout details (the bank must verify that they will pay your vendors according to the contract). Otherwise you may incur extra fees from your vendor because they can’t pass along a chassis discount, for example. This is a hidden way you will pay more for your financing choice even though your lender is not charging the fee.
In summary.
The key to any successful RFP process is to know what you want. Just as you didn’t send out RFP’s for a “fire truck” without any specifications about chassis, engine, transmission, or pump, you shouldn’t send a RFP for financing proposals without specifying the exact terms you want. Explore the options before you bid and with someone you trust and is knowledgeable. Require specific information that your lender has to put in writing upfront so that you create a fair proposal environment, get more interested bidders, and get a easily comparable set of proposals to choose from.