Department of Wood and Paper Science Wood Products Extension Harry W. Watt, Business Improvement Specialist 132 Beckham Road Statesville, NC 28625-8109 e-mail: harry_watt@ncsu.edu 704-880-5034 (cell) General Information on Financing Small Sawmill Operations Small Sawmill Workshop, WERC, June 10 th, 2010 (note some of this information is unique to North Carolina) Discrimination Policy Statement The work upon which this project is based was funded in whole or in part through a grant awarded by the Wood Education and Resource Center, Northeastern Area State and Private Forestry, U.S. Forest Service. In accordance with Federal Law and U.S. Department of Agriculture policy, this institution is prohibited from discriminating on the basis of race, color, national origin, sex, age, or disability. (Not all prohibited bases apply to all programs.) To file a complaint of discrimination, write USDA, Director, Office of Civil Rights, Room 326- W, Whitten Building, 1400 Independence Avenue, SW, Washington, DC 20250-9410 or call (202) 720-5964 (voice and TDD). USDA is an equal opportunity provider and employer. Purpose-this educational handout discusses some of the elements of financing small and medium sized wood products operations for the purpose of providing useful information. This information is designed to provide useful general information about financing wood products operations in North Carolina and does not to suggest that any specific mode of financial assistance is appropriate for a specific business situation. Important major points about seeking outside funding: 1. Owners will have to put up some of their own money to fill the business needs. Equity partners and loaning agents have limits to the amount of risk they are willing to take and if the owners are well invested, others will more willing to invest. 2. Line up sources for money well in advance of the actual need. If you are in quick needs for money it will be extremely difficult to get. So, plan to obtain equity or borrowed funds well in advance. 3. Equity sources include working partners, non-working partners and venture capitalists that owners have to give up ownership rights in the business to obtain money. 4. Borrowed sources include loans that you repay with interest. Banks and public bonds may be sources of loaned money. 5. Grants may be obtained from public sources that do not have to be repaid for opening a business or adding employees. 6. It pays to develop a strong relationship with the bank that handles your routine business practices. If your local bank does not have the interest to offer you loans if you were in need, it may be advantageous to move your accounts to a bank that is lending money to wood products operations like yours.
7. Look at the makeup of the board and loan committee at the bank you plant to submit a request for a loan or a line of credit. If there are not manufacturers sitting on those boards or committees, it is likely that you may find they are not friendly to manufacturers. 8. Costs of borrowed money increase with risk, so it is important that the business owner apply good management practices and obtain steady profitability and sales growth. It may be that the lowest cost of loans can be government supported loans followed by commercial bank loans. SBA loans are generally more expensive than commercial loans because of the cost to provide additional support. Supporting groups are likely to be more expensive that SBA loans because of additional risk and support costs. Finally there are higher risk loan groups that charge higher rates for loans with more risk than commercial institutions want to carry. Each situation is unique and the cost of borrowed money varies greatly from one source to the next as well as repayment terms. Financing Very Small Wood Products Businesses Many startups involve one person shops and are often financed with credit cards and home equity loans. There should be some caution given when using credit cards as they typically carry very high rates of interests. Home equity loans are often used because of the ease of getting them without having to go through the loan procurement processes of banks. A common problem that occurs with non-bank financing often is the lack of upfront business planning that the loan application typically requires. It is important that the business owner fully plan out the business on paper before investing money from any source. It the business has problems to resolve they are much cheaper to correct on paper before any money is actually spent. In the North Carolina mountain counties the Mountain Microenterprise Fund supports small businesses with microloans that typically are $5,000 or less. They also offer support with classes on business topics and consulting advice. They are headquarters is in downtown Asheville and their website is www.mtnmicro.org. North Carolina Department of Commerce One important support group is the North Carolina Department of Commerce. The have support staff in Raleigh as well as out in the field that have the duty to support North Carolina Businesses. Their website is http://www.nccommerce.com/ and the site lists these funding sources for businesses: Tax Credits-The William S. Lee Quality Jobs and Expansion Act rewards eligible companies expanding or relocating in North Carolina that hire within the North Carolina workforce to fill positions. Industrial Revenue Bonds-The State's principal interest in Industrial Revenue Bonds is assisting new and expanding industry while seeing that North Carolinians get good jobs at good wages. Composite Bonds-The Composite Bond Program looks to build on the already advantageous aspects of the issuance of Industrial Revenue Bonds. 2
Community Development Block Grants-These funds may be accessed by local government applicants (municipal or county, excluding entitlement cities or designated urban counties) with proposed projects that involve a specific business creating or retaining jobs. The Industrial Development Fund-IDF provides incentive industrial financing in the form of grants and loans. These funds may be accessed by local government applicants (municipal or county). One North Carolina Fund-The One North Carolina Fund may provide financial assistance to those businesses or industries deemed by the Governor to be vital to a healthy and growing State economy and are making significant efforts to expand in North Carolina. The fund is a competitive fund and the location or expansion must be in competition with another location outside of North Carolina. Criteria for the program is available through the NC Department of Commerce Finance Center. Job Development Investment Grant-This discretionary incentive may provide sustained annual grants to new and expanding business measured against a percentage of withholding taxes paid by new employees. The program is competitive and the Economic Investment Committee, which oversees it can award up to 25 grants in a calendar year. Contact the NC Department of Commerce Finance Center for the detailed criteria. Priorities on support funds partially depend upon need. US Department of Commerce The US Department of Commerce also provides some support programs through the Economic Development Administration. Their web site is http://www.eda.gov/. The US Small Business Administration is supportive of wood products manufacturers and is often offer loan support of bank loans. Information on the SBA can be found on their web site at http://www.sba.gov/. There are many options available with the SBA, but a common loan support program is the Basic 7(a) loan guaranty program with many options, including the Certified Development Company (504) Loan Program and the Microloan Program. Program Basic 7(a) Loan Guaranty-Serves as the SBA s primary business loan program to help qualified small businesses obtain financing when they might not be eligible for business loans through normal lending channels. It is also the agency s most flexible business loan program, since financing under this program can be guaranteed for a variety of general business purposes. Loan proceeds can be used for most sound business purposes including working capital, machinery and equipment, furniture and fixtures, land and building (including purchase, renovation and new construction), leasehold improvements, and debt refinancing (under special conditions). Loan maturity is up to 10 years for working capital and generally up to 25 years for fixed assets. Customers include start-up and existing small businesses. The loans are delivered through commercial lending institutions. More information can be found at www.sba.gov/financing/sbaloan/7a.htm. 3
4 North Carolina Cooperative Extension Service Certified Development Company (504) Loan Program-The CDC/504 loan program is a longterm financing tool for economic development within a community. The 504 Program provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings. A Certified Development Company is a nonprofit corporation set up to contribute to the economic development of its community. CDCs work with the SBA and private-sector lenders to provide financing to small businesses. There are about 270 CDCs nationwide. There about 270 CDC s nationwide and 11 of them operate in North Carolina. Typically, a 504 project includes a loan secured with a senior lien from a private-sector lender covering up to 50 percent of the project cost, a loan secured with a junior lien from the CDC (backed by a 100 percent SBA-guaranteed debenture) covering up to 40 percent of the cost, and a contribution of at least 10 percent equity from the small business being helped. Also available is the small loan program called Microloan, a 7(m) Loan Program. Its function provides short-term loans of up to $35,000 to small businesses and not-for-profit child-care centers for working capital or the purchase of inventory, supplies, furniture, fixtures, machinery and/or equipment. Proceeds cannot be used to pay existing debts or to purchase real estate. The SBA makes or guarantees a loan to an intermediary, who in turn, makes the microloan to the applicant. These organizations also provide management and technical assistance. The loans are not guaranteed by the SBA. The microloan program is available in selected locations in most states. Customers for these loans include small businesses needing small-scale financing and technical assistance for start-up or expansion. They are delivered through specially designated intermediary lenders (nonprofit organizations with experience in lending and in technical assistance). More information for the Microloan program can be found at www.sba.gov/financing /sbaloan/microloans.htm. Community Banks There are many small community banks that may be more interested than larger commercial banks In loaning money to wood products manufacturers. These bank often are led by managers that were downsized from recent bank mergers of large banks and are focusing on smaller businesses in areas that may include a few counties. Management Strategies to Reduce the Need of Borrowed Funds Owners and managers of wood products manufacturing businesses should utilize business strategies that reduce the need for borrowed money. Some of these business strategies are listed below: Use of money Business strategy How works Inventory-raw materials Vendor owned inventory Pay for usage on a weekly or monthly basis as consumed Inventory-work in process Production line manufacturing or cellular manufacturing Eliminates most of inventory between work centers Inventory-finished goods Make to order processing All finished goods are sold in advance of processing Labor High labor productivity via connection of work centers Eliminates stops and waits for processing Accounts receivable Upfront deposits Gets money before production Accounts receivable Discounting for quick payment Gets money within 10 days or stated discount period Accounts receivable Net 30 day payment Gets money within 30 days of shipment
Summary Wood products manufacturers should develop financial skills in order to better manage their operations for profitability and sales growth. Business owners and managers should work towards financial responsibility so that when borrowed funds are needed that they are available and reasonable in cost. The North Carolina Department of Commerce and other organization are available to help. Business owners and managers should use business strategies that lower the need for cash in order to limit the need of borrowed funds and self finance a good portion of their operation and expansion efforts. It is common with a good management plan to increase profitability by three times over operations that do not apply good business management techniques. 5