Many farms rely on debt to operate, whether for cashflow or investment purposes, but what is the best way to approach it?
Melanie Jenkins reports...
There are many reasons for farm borrowing – from covering cashflow to purchasing land.
When it comes to assessing the business’s finances, the first question to ask is whether the existing arrangements are fit for purpose.
Rachael Ruane, partner at Burges Salmon, advises farmers to consider how supportive their financier is and if there are any penalties for refinancing.
“While we are faced with ongoing uncertainty, most of the banks have not changed their lending policy and now, with low interest rates, is a good time to lock-in and refinance," she says.
So how can farms and estates raise money? There are a number of different choices and the pros and cons of each should be considered. Options include mortgages, overdrafts, bridging loans, lease purchase and other, more niche, alternatives.
Ms Ruane adds: “It is easy to fall into the trap of thinking the hassle of shopping around will outweigh the benefits of simply going with your existing financier.
“Your existing bank might be the cheapest, they might not be.”
Ms Ruane says the first step should be to get to know the relationship director.
"Invite them to the farm and make that connection," she advises.
"Get your business plans together; lawyer fees are a lot less if you get the pre-planning work done.”
It is also important to understand what the financiers need – including an accurate valuation, updated business plan and a security package – which will depend on individual circumstances.
Prepare for bear traps: Is the business incorporated?
Are there any restrictions on the land, or issues over raising finances?
“If the business is not represented by a lawyer, you do have to read the documents so there is nothing that comes back to bite you,” adds Ms Ruane.
“Standard form documentation can be amended – banks do not like doing it, but it is possible.”
Ultimately, successful debt is about understanding your own financial position, good communication, assessing options and accepting help.
“Be bold and commit to regular business reviews. Banks are far less trigger happy these days, and the preference will always be to support farming businesses," adds Ms Ruane.
How refinancing can help farmers grow their businesses
Farmers considering refinancing borrowing need to focus on a sustainable future as the industry prepares for the year ahead.
Alick Jones, regional agricultural manager for the Agricultural Mortgage Corporation (AMC), says he has seen a ’strong appetite’ from farmers looking to refinance borrowing to help support their day-to-day activities and grow their businesses.
One option was to fund an existing loan over a longer term, helping ease cashflow and release working capital for the day-to-day running of the business, or investments.
“However, it is important to agree a deliverable repayment strategy from the outset,” he says.
“We as lenders need to know the refinance will generate sufficient cash in the future to meet the lending commitment and that the refinance term is appropriate to the life of any assets that are purchased with the original borrowing.
“Land, buildings and improvements are usually funded over a longer term, while stock and machinery purchases are more suited to shorter-term loans.”
Following on from this, he says a farming business must ‘focus on the future’, ensuring they have enough short-term working capital to grow and navigate uncertainty, avoiding additional overdrafts or creditors.