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alternative financing
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Even in good economic
times, securing sufficient funds to replace
vehicles in a timely manner can be a
challenge for fleet organizations. Mercury’s
consultants have helped many clients meet
this challenge head-on with analysis and
recommendations of alternative financing
strategies.
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Dealing with the
Mismatch |
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Especially in large
“mixed vocational” fleets that contain
various types of vehicles and several
different usages for those vehicles, the
year-to-year demand for replacement spending
is inherently volatile. Many organizations
have not developed the proper financing
strategy to deal with this volatility,
because their sources of funds for financing
vehicle purchases are stable.
This mismatch can often result in strong
pressure to cut back on replacement funding
to balance the budget. But that usually just
transfers expenditures to future periods and
increases the overall cost of the fleet
operation.
Rather than putting off needed purchases,
Mercury recommends that you consider
changing the way that you pay for them.
Cash, savings, and debt financing all have
advantages and disadvantages. |
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Cash financing, or
paying for purchases from current
income, enables you to avoid interest
expense. But it still leaves you
vulnerable to the peaks and valleys of
spending demand. Organizations that
finance with cash tend to have older
fleets, high replacement backlogs, and
high maintenance costs because they
often defer purchases in years of peak
spending needs. |
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Savings financing,
which employs a sinking fund, eliminates
volatility and tends to encourage the
disposal of unneeded vehicles. But a
sinking fund is expensive to establish,
and it can be “raided” during lean years
to meet unrelated spending requirements. |
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Debt financing,
through instruments like bonds, bank
lines of credit, and leases, can
eliminate volatility in funding
requirements. But debt is expensive and
can subject the organization to
interest-rate risk. If the fleet serves
a public-sector organization, the need
for government approval can further
complicate matters. |
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There is no “best
approach” to financing fleet replacement
costs. Mercury can help you evaluate the
fiscal, economic, administrative, and
political considerations you face, so that
you decide on the financing method that’s
best for you. |
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Mercury
Associates, Inc.
Professional Fleet Management Consultants
16051 Comprint Circle
Gaithersburg, MD 20877
301 519 0535 Office
301 519 0536 FAX
email:
contactme@mercury-assoc.com
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Fleet Management
Consulting Services and Business Solutions,
Simplified ™ |
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© 2006 Mercury
Associates, Inc. |
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