Timber
Business Loans

Small business owners looking to acquire, merge with, or start a new business will have different funding needs than existing business owners. In addition to the purchase price, you’ll have to pay lawyers to look over and prepare documents, accountants to review the books, and other professionals to help close the sale. 

In these circumstances, the amount of money you need to put down or the percent of the purchase you need to fund through a loan will influence the type of financing that’s best suited for your purposes. You should likely apply for a large business loan. 

If you’re already in the timber industry, you have data from past year’s sales and expenses to inform borrowing decisions. You can predict cash flows and will know, for example, if you need to borrow to fund equipment repairs. Past cash flow and customer behavior can also help you forecast how an expansion or adding new lumber mill capacity could impact your sales revenues.  

Existing business owners have a financial history to include in a loan application. You could have assets to pledge as collateral, such as allowing the lender to file a lien against your lumber mill. Borrowing as an existing business owner is easier, assuming that you’ve been profitable.

Opening a new lumber mill or investing in a seedling nursery? You’ll have to locate an appropriate building to lease or buy, and cover monthly rent or the mortgage while possibly renovating it. There will be upfront costs like buying logging machinery or saws, and once you’re up and running you’ll have to pay utility bills and other fixed expenses before the operation turns a profit. 

Small business owners expanding or investing in an existing business could face many of the same costs. 

Here are some of the most popular reasons those in the timber industry take out small business loans:

• Purchase new timberlands
• Expand in or start a new seedling nursery, chip mill, or sawmill
• Equipment purchases such as forklifts, saws, pallet jacks, and storage racks
• Cover operating expenses during lean times

Knowing why you need the money helps set your borrowing limit and dictates how much cash you need to fund the business plan. 

Before borrowing, it’s important to know how the new debt will impact your business’s cash flows. After you’ve paid fixed expenses like the mortgage and utilities, how much free cash flow is available to make loan payments? Take a hard look at your budget before you borrow.

Lenders calculate your monthly loan payment by taking the loan’s size and applying its terms, such as a repayment period and interest rates. Consider scaling back your plans if the monthly payment on the loan you need isn’t affordable. 

Your cash flows must cover the loan payments – particularly if there is a delay between when you have to pay for any acquisitions or new equipment and when that spending generates revenues. When making a budget and determining what you can afford to borrow, include a plan to pay back the loan. And try to plan for the unexpected, just as difficulties installing new equipment or a power failure that kills your new seedlings.

How much revenue will your new chip mill generate in the first year of operations? In the third year? Before you borrow to fund an acquisition or project, you must have a reasonable expectation that it will make a profit. 

Anytime you borrow to fund a small business project its expected return should cover more than the loan’s cost. The project should also generate more revenue for your business in the long run, not just break even. Evaluating a potential project in the timber industry can get quite complicated given the variables of rate of timber growth, timber demand, and industry regulations. 

Before taking out a loan, run a few financial scenarios and determine if the project’s revenues will both pay back the loan and generate a profit. Consider the worst case scenarios, and how you might handle them or mitigate their negative impact. 

A loan’s term is the time you have to repay the lender. Shorter repayment terms equate to a higher loan payment, since the repayment is spread out over a less time. But even though it would lower your monthly payment, a longer repayment term isn’t always the way to go. You don’t want to still be paying on a loan when you’re no longer receiving the benefits of what it funded.  

For example, let’s say you’re taking out a $7,000 loan to cover the cost of a new forklift. The forklift will be fully depreciated after three years. If you took out a five-year loan to finance ir you would still be paying on the loan after it had no value (and already might need replacing).

For capital investments like a new saw mill, apply a matching principle. The funding’s term should end when the project is complete and/or fully depreciated. 

Maybe you need access to funds on an ongoing basis – to make payroll, pay rent during a slow month, or to draw on for unexpected expenses. For ongoing needs, a line of credit would work best. Similar to a credit card, a line of credit often has lower rates. Small business owners draw on the funds as needed and only owe payments when they’ve borrowed.

Small business owners with poor credit, or whose business has defaulted on a loan in the past, will find it harder to borrow now. Your personal credit score and the business’s credit history impact how many lenders will work with you and the loan’s rate and terms. Before applying for loans or talking to lenders, pull a free copy of your credit report and check your credit score. 

Depending on what it says, you may want to skip applying at a bank and go directly to alternative lenders. Most banks only work with borrowers who have credit scores above 750, at least two to five years in business, and strong financials.

You can still borrow with less-than-stellar credit or some bumps on your credit history, but you’ll have an easier time working with an alternative lender. These lenders specialize in working with borrowers that banks won’t consider.