Active Credit Lines
Carver says he would need bank financing to expand. But for the time being, Stephens is like many other dealers and distributors that are hunkering down and aren’t tapping their banks for money as regularly as they once did. Three-fifths of the pro dealers who responded to a ProSales survey last fall said that, up to that point in 2008, they had not gone to their banks seeking capital. And because they are doing less business right now, dealers are retaining cash by reducing their inventories and not borrowing as much against accounts receivables.
Ganahl Lumber hasn’t borrowed money in five years; it is currently self-financing its inventory purchases. The “most obvious reason” his company might start borrowing again, says John Ganahl, is if “a desirable acquisition came along.” But there have been relatively few mergers and acquisitions among pro dealers, and many companies are simply staying pat for now.
“During the last housing boom, we didn’t expand as rapidly as some LBM dealers, so we’re in better shape financially,” says Bill Meek, president of Sacramento, Calif.?based Meek Lumber. His company hasn’t borrowed money “for a while,” and has no plans in place for 2009 that would require new debt.
Nevertheless, Meek subscribes to the idea that it’s wise for dealers to keep open unused lines of credit, even if it’s a small amount, as a means of keeping alive their relationships with banks. Buck says he maintains a credit line for Buck Lumber equal to between 60% and 70% of its accounts receivables,” even if I’m not using it.” And after ILBSA retired a $25,000 line of credit in negotiated two years ago, Murphy says he immediately took out another loan for $250, and then paid it back, “just to re-establish our creditworthiness.”
If the economy continues to reel, dealers seeking bank financing better be ready and able to prove the integrity of their balance sheets to lenders, because alternative sources of financing–such as private equity money or finding new partners–come with their own price tags that often require dealer-owners to relinquish the very asset they treasure the most: independence.
–John Caulfield is a contributing editor to ProSales.
