The biggest challenges in financing for new logging businesses
As experts in startup and new business finance, American Leasing has assisted thousands of entrepreneurs with the tedious process of getting their logging operation off the ground.
This experience has given us some serious perspective on the challenges facing equipment-intensive industries like construction and logging. Consider this: logging companies often need an average of four pieces of heavy equipment compared with two needed for most construction niche or trucking companies. Forestry operations are process oriented businesses and the most successful companies are ones who can handle multiple phases of that process – from cutting and felling, to forwarding, delimbing, and processing. In fact, many logging companies even specialize in transporting logs and chips to mill with their own log trucks and trailers.
What this need to specialize in multiple processes creates, however, is the need for lots of equipment. With excavation companies, a single excavator is usually enough. With pavers, they can get started with just a single paving unit. Brand new logging companies, on the other hand, usually need a loan for a feller buncher, skidder, and log loader just to have the basics. It’s not uncommon, therefore, for us to receive daily requests from loggers for $200,000 in equipment just to establish a new venture. Over time, this serious need has caused us to train our representatives on the basics of how to help our newer forestry industry customers get on the right track to smart growth.
Age isn’t just a number
Logging equipment is used in some of the toughest terrains in the world. Because of this, it’s understandable that lenders and customers alike are averse to buying exceptionally old machines. Because we have no age restrictions on logging equipment, we like to counsel customers to pursue a happy medium between brand new equipment and older, but still valuable equipment. The reason for this is simple: a newer harvester (provided it has the same mechanical capacity) makes a logger no more money than an old one. It can be tempting to buy something shiny and new, but if you can find a good, low-hour feller buncher, or better yet a feller buncher that was part of a well known companies fleet (and subject to a high standard of maintenance), you’ll be better off because of it. Consider this: a $50,000 feller buncher will cost a customer an average of $1,600-$2,000 a month. On the other hand, a $150,000 one will cost between $4,800-$6,000 per month. That savings, over the course of four years is as much as $200,000. If you are mechanically inclined and have the ability to maintain a solid piece of used equipment, the savings are well worth it. What’s more, most lenders don’t like to lend hundreds of thousands of dollars to a startup logging company. Choosing a more budget friendly used machine will make it substantially easier to qualify.
Without working capital, it just doesn’t work
A lot of loggers pursue financing with just enough money for their first month’s payment and documentation fees, but never consider that there are too many things that can go wrong to operate on such a tight budget. For wage earners looking to turn a corner and start their own venture, we advise saving a cushion of around six months worth of working capital to cover expenses like equipment payments, insurance, potential maintenance and repairs, fuel, and payroll. Having reserves not only improves your practical odds of success in a very competitive forestry world, but also makes you less of a risk to a lender. Without a track record of success in business, the only way a logging finance company can judge your chances of being profitable are your personal credit, work experience, and cash on hand. If you can alleviate on of the biggest concerns by showing a nice rainy day fund or savings, you’ll make your finance or leasing officer’s job much easier.
Temper your expectations
Most logging companies, assuming the owners have good personal credit, can qualify for around $100,000 in equipment financing. That’s a far cry from what most of them want day one. If you can lower your expectations and choose equipment that will get you by and allow you to begin generating revenue, you can always upgrade to bigger and better equipment in time. Our rule of thumb is that most owners should begin to build real equity in their equipment about 50% of the way through the term. If you finance on a 60 month term, you can probably start thinking seriously about buying something else 2 1/2 years through your lease or loan term. Logging equipment finance companies are real sticklers about customers biting off more than they can chew, but business owners who opt for slow growth can win the hearts of underwriters and demonstrate genuine business savvy – the kind that turns startup companies into success stories.
Cutting right to the chase
Obtaining logging equipment as a startup in the equipment intensive forestry world can be challenging, however, customers who aren’t afraid to buy used equipment, can show working capital and reserves, and who don’t mind buying less (or at least less expensive) units are bound to be more successful in their pursuits.
At American Leasing & Financial, we’re so passionate about logging equipment financing (and financing for log trucks and trailers), that we actually created a special financing program just for loggers. Logging Finance .com is a niche funding processor backed by two dozen boutique funding sources and banks, as well as our own in-house funding arm, American Leasefund. We pride ourselves on offering flexible forestry equipment lending programs, regardless of credit issues, for startups and established businesses alike. Learn more at www.loggingfinance.com OR apply now for an logging equipment loan approval in as little as 24 hours.
