I wanted to take a few minutes to talk about financial services and the difference between a quality, ethical lender and some of what I have seen in the marketplace over the years. Logging is one of the most dificult businesses that anyone can undertake. Unfortunately, many loggers do not benefit from quality financial guidance when they seek out loans for equipment, land or timber. As with most challenging businesses, the default rate is higher for logging and sawmilling than other businesses and the interest rates that loggers and millers pay are elevated because of this. However, it is not unusual to find lenders who seek out loggers exactly for this reason. Why would they seek out more risky loans? Well to put it simply the money is better because the risk is greater. Unfortunately, many of these guys push rates that are above and beyond what the market would normally dictate.
First and foremost a lender might hit you high, perhaps 15% or more to see if you flinch (so to speak). This is very common in many industries as the lender is leaving some fat on the deal so he can trim later if he has to. Of course they will say, “well you have not been in business very long, or you have one or two slow pays”, etc. Once when I was buying my first car, the finance manager told me I had spotty or poor credit because I had not paid an electric bill on time. Of course I’m 19 or 20 years old and he’s in his forties and you just tend to believe folks that are older. At that time I did not understand that car dealership ‘finance managers’ are paid to rip people off.
The point here is that Financing is one of those professions that is still relatively open and if you put some effort into getting a state certification or license, then anyone can essentially call themselves a loan officer or consultant. I am especially leery of national lenders who are not necessarily equipment lenders, but also lend money for boats, homes, student loans, etc. They do not have any real understanding of or commitment to any particular business. If you are going to lend to loggers then you need to understand the business so you can properly serve your clients. A good example is the now defunct CitiCapitol (Bought by GE Capitol 2 years ago), would lend money on anything and everything. The problem is they do not understand the natural cycles that effect these businesses. Deere Credit, CAT Financial, Wells Fargo and others will make a serious effort to work with the borrower when times get tough. If a lender is eager to repossess machines, it is in my opinion cutting of its nose to spite its face. Everyone loses in a repossession.
It is clear from experience that you will always get a better deal if you can work with and establish credit with your hometown savings bank or regional farm credit bank. These institutions follow established guidelines for lending, offer very good rates and if you qualify will give you the best rate available without having to arm-wrestle for it. Qualifying for the best rate and maintaining a strong credit rating is another matter entirely. There was a time when I had let my credit score deteriorate by making some bad decisions. I was young and so we will chalk it up to youthful stupidity. One very effective technique that allows you to rebuild your credit is simple and it works. Go into your local bank with $1,000 (you might have to save it up for a bit). Setup a CD (Certificate of Deposit with a 12 month term). A few weeks later stop in and ask to borrow $1,000 for personal reasons (car repairs, etc.) and offer the CD as collateral. They will enthusiastically loan you the money because they have your $1,000 already in the bank and therefore the loan to them is risk-free. When they issue you the loan simply pay it back every month with the monies you borrowed.
You will pay some interest and loan fees, but the benefit will be real and almost immediate. Not only will you develop credit with your local bank, but your overall credit rating will improve month to month. I used this simple technique along with the always wise policy of paying my bills on time, to go from a score of 600 to well over 720. The loan term must be at least 6 months, therefore ask for a one year loan and simply pay it off in 9 months. A lesser term is not reported to the credit bureaus. Another technique that can help you rebuild your credit is to use a credit card for your parts purchases, fuel and other monthly expenses. Instead of paying cash use a Visa card, paying it off at the end of each month. Do not allow the card to carry a balance more than two months. This will also build your credit score and allow you to qualify for loans down the road.
I find a lot of my customers are ‘old-school’ and want to pay cash for everything. While I respect this the modern banking system does not and your credit rating will suffer if you do not have any charge accounts. Therefore, it is wise to have a couple of notes that you are paying down aggressively, but maintaining at least one loan account at all times even if it is small (under $10,000). I hope this has been helpful to you as you try to navigate the pitfalls of building a successfful timber business. If you need help borrowing money to purchase your next timber tract or log skidder please let us know. We have quality lenders who are always willing to help.