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Timber Business Loans

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How To Get a Loan in the Timber Industry

Logging, timber, and wood produces raw products used in manufacturing, paper goods, and more. In the United States, it provides employment for 2.5 million people, produces $300 billion of products, and makes up 47% of raw materials used in manufacturing. The industry’s growth prospects look favorable, with pent-up demand expected to drive revenue increases in 2021 and lumber and wood prices at an all-time high.

Now is the time to expand your timber business or look into a merger or acquisition to fuel growth.  While you could have the cash reserves to fund your plans, after years of great sales, it’s not always a good idea to use your own capital. If dipping into your cash reserves could make it harder to meet current obligations, or if your revenues have been used to pay off old debt, borrowing could be a smart choice.

If you’re ready to borrow now, it takes just a few minutes to apply online. Before you apply you should know the funds intended use, how much money you need to borrow, and the best loan for your timber company.

Top Considerations Before Applying for Financing in the Timber Industry

Making sure taking out a loan is a successful borrowing experience requires preparation. Asking yourself several key questions will guide you towards the best loan for your company’s needs. 

Are you already an owner or are you looking to open or acquire a new business?

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.

With a solid plan of how you’ll use the funding you can demonstrate the increased revenues that the loan will bring into your business. Banks could look favorably on your loan application, though you’ll have to find a lender who works with your industry and understands its ebbs and flows. 

If you’re opening a new lumber mill or Christmas tree farm, it will be harder to qualify for a traditional loan. When you apply, you’ll need a robust business plan and strong cash flow projections, as well as an excellent personal credit score. Lenders could require that you pledge personal assets – such as investment or retirement accounts – to secure the loan. 

Banks demand detailed plans, financial statements, and excellent credit. If you lack experience in the timber industry, they’ll be wary about lending to you. Newer small business owners will find it next to impossible to obtain a loan from traditional funding sources. 

Why do you need the funds? 

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. 

What can you afford to borrow? 

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.

Will the project generate a profit? 

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. 

Establish the funding timeframe 

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.

What is your business and credit history? 

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. 

Best Business Loans for the Timber Industry

There are multiple loan products available to small business owners. One of these options will be the best choice for your plans to succeed in the timber industry. 

Large Business Loans

If it’s time to invest in an acquisition or new chip mill, look into a large business loan. These loans let you borrow between $50,000 to $2 million, perfect for a larger project. Because a large business loan is meant for big projects, it has a longer repayment period. 

To qualify you must have a credit score above 530, minimum monthly revenues of $10,000, and you have to be in operation for two months. Within as few as 24 hours after you apply you could have the funds needed to launch your project.

Merchant Cash Advance

If you run a large amount of credit cards through your business, look into applying for a merchant cash advance. When you take out a merchant cash advance, you sell a percentage of your credit card receivables to the lender and they collect on future sales. They base how much they’ll advance you on past credit card sales, so you’ll need to provide your past few months bank statements and credit card receipts to apply. 

Repayment on a merchant cash advance comes from future credit card sales, which makes repaying the loan easy. It’s deducted from your cash flow in dollars and cents, not a large, monthly lump-sum loan payment. If you have minimum monthly revenues of $8,000 and most flow through credit cards, you can apply for a merchant cash advance with a credit score as low as 500.   

Small Business Loans for Consolidation

After a few hard years, the timber industry has bounced back. But you may still be carrying debt from the lean times. Consolidating your debt could save you money on interest and lower your monthly payments. 

Business loans for consolidation help small business owners pay off and roll multiple forms of debt – small business loans, lines of credits, or credit cards – into one loan product. With only one loan payment, it makes budgeting easier. And, often, the interest rate on your combined loan product is lower than what you had been paying. 

Working Capital Loans

Working capital loans help pay for day-to-day operations like utility bills, payroll, or gas for delivery trucks. These loans help with operational expenses and keep the lights on – literally.

When you apply for a working capital loan, the underwriting process is faster. Underwriters look at bank deposits and monthly revenues when making a funding decision. If you’re experiencing a temporary cash flow crunch, you could get funded in time to meet current obligations.

Business owners with credit scores above 650 and just two months in business can qualify for a working capital loan. 

If applying at traditional banks seems hopeless, consider reaching out to an alternative lender. Alternative lenders best serve the needs of small business owners who have the skills and ideas to succeed but might not have the great credit score to work with a bank. After just a few minutes to gather documents you can apply online now!