Reviewing farm borrowings could alleviate cashflow pressures or create flexibility in the business

Three years of downward pressure on commodity prices is paying its toll on many producers. For many, cashflows are becoming harder to manage. The prospects across the different sectors for the year ahead don’t look promising either.

A regular review of farm finances and their costs is always important and even more so in times when cashflow is under pressure or before a third year of less profitable farm accounts are filed.

A quick check of the current finance arrangements would show if the cashflow position of the business could be eased and/or if the business could be given more flexibility by:

• rescheduling hard core overdraft debt onto longer term loans;
• changing shorter term loans or liabilities onto longer term loans;
• restructuring any existing loans onto interest only loans; and
• adjusting or rescheduling repayments.

For example, machinery finance of £30,000 financed at 6% over 3 years would cost around £912 per month. If this were restructured as part of a funding strategy on a 25 year loan at 3% (assuming 2.5% over bank base rate) it would reduce monthly repayments to £142 per month. This would alleviate cashflow issues – or if it was sensible to do so, the difference of £770 per month could allow for a borrowing of a further £162,000 for important infrastructure developments or the expansion of an enterprise.

A review now could also strengthen your overall banking relationship by helping your bank better understand your business, your objectives and your current position.

Current interest rates give an ideal opportunity

Interest rates are the cheapest they have ever been, and in the long term there is currently talk of rates falling even lower. This is being reflected in the banks’ appraisals of lending proposals too. We are seeing some banks reducing their sensitivity analysis criteria.

Where some banks normally apply an interest rates of 6% to 7% on loan proposals to check what effect an interest rate of that level would have on the borrower’s ability to meet repayments, we’ve seen some banks now drop their sensitivity to rates as low as 5%. With these slightly softer criteria it’s making applying for finance less onerous for some.

Be prepared to negotiate terms

A finance review now could be beneficial for a farm business. But we would caution that you:

• be aware of any penalties for early repayment or lump sum payments. Negotiate with your lender to reduce or remove these on existing or new borrowing
• be prepared to negotiate on your bank’s offer - don’t accept their first offer and terms
• take specialist professional advice that’s independent from your bank.