Story by Jennifer McCary,
Senior Associate Editor
The economic assessment that “the worst is behind us” has almost become a mantra among economists, politicians, financial analysts and many CEOs. One can only wonder how much is wishful thinking and how much is reality.
Yes, there are signs of recovery, even in wood products. For example, two shuttered sawmills and a plywood plant near my home in southwest Alabama have begun taking logs and plan to reopen soon and elsewhere new biomass power and biofuel projects will also be coming on line this year.
But the path to recovery still has potholes aplenty, especially for small to medium sized businesses that make up the majority of our industry. Access to capital is critical if small businesses are to endure, expand or possibly diversify—all of which create the jobs that are the fuel of recovery.
Despite pressure by the Obama Administration to break the small business credit logjam, the opposite is occurring. Every month since last April, when the Treasury Dept. started requiring a monthly report, the nation’s 22 major banks have tightened their small business lending. The Small Business Lending Index, a measure of the overall volume of financing, reflects that continued reluctance, although November’s decline of 11% is an improvement from earlier indexes. From January to May 2009, the index fell 25 to 33%; and June to October it was down only 16 to 21%.
So the trend is moving in the right direction and many of the large banks have announced plans to increase those loan balances in 2010. As the bank executives tell it, loan demand has remained slack as the economy has marked time. Moreover, finding credit worthy borrowers is a challenge. With revenues down and profits low or nonexistent for many small businesses over the last three years, not to mention depressed real estate values, many business owners no longer shape up as good credit risks in the financial world’s new order.
Some loggers have already felt the sting of this situation and it probably won’t get any better any time soon. Recently a dealer in Georgia had a deal pending with a reputable, responsible, longstanding contractor who had faithfully stayed the credit course for more than 20 years. His personal net worth had taken a hit but was still respectable, and he had little debt. But because his logging business had not shown a profit in the last three years, he was denied credit by the dealer’s captive finance organization. So the logger has no new equipment and the dealer/manufacturer lost a sale.
As I understand it, the pool of lenders willing to conditionally finance logging and other heavy equipment has dwindled to three or so and lending criteria are much more rigorous. If solid, experienced loggers with good credit histories are being turned down, then inexperienced applicants need not apply.
Even lenders for used equipment require an A-1 credit history and 25% down payment. Even so, few local banks will touch it because they were badly hurt by repossessions of late. That leaves few options other than two big finance companies. One used equipment dealer sometimes uses a third company but he says it takes a month to get approval and the customer has to have flawless credit, put 30% down and pay 18% interest. He says the days of a logger coming in to get some used iron and starting out on his own without the backing of a big wood dealer or company are over.
Tight credit is a problem that could collectively set back logging businesses, impact logging capacity and challenge both established and emerging wood fiber consuming interests. Not all can do so but some loggers could help themselves by changing the way they compensate themselves and how they manage their business affairs so that their businesses show at least a small profit. The upper end of the wood fiber supply chain could help by offering months-long contracts instead of clinging to outmoded procedures. Few financial institutions eagerly lend money to a contractor who has no contract of substance. Hopefully, the worst is behind us and better days are ahead, and hopefully credit institutions will gradually ease up a bit, but it appears financing issues may cause ripples for quite some time.