15 years of R&BS – how the market has changed and what's changing

It’s 15 years since Jim and Rob founded R&BS. After many years working in agricultural banking, they recognised the limitations and restrictions that banks were imposing on their clients. Jim and Rob believed they could use their wealth of experience to overcome these barriers to give each client the best choices and terms of funding. So, R&BS was born to provide expert guidance, finance choices and bespoke funding solutions for every unique rural enterprise. 

Stringent bank lending policies remain the largest influence in most funding decisions. But, several significant changes over the last 15 years have shaped an interesting and dynamic period for us and our farming and rural clients. We detail four main changes in this blog and give strategies to help farms and rural businesses enhance their opportunities and capitalise on these changes. 

1)    Credit crunch, regulation and cost cutting in the high street
2)    The rise of private banks and alternative lenders
3)    Interest rates and future predictions
4)    Agricultural debt and cash-flow squeeze

1.    Credit crunch, regulation and cost cutting in the high street

Increased regulation since the financial crisis of 2008, coupled with the present Brexit uncertainty, is putting pressure on traditional high street lenders. Lenders are becoming more cautious and less willing to show flexibility in the way they consider lending proposals. This comes as a direct result of the introduction of more rigid policies. 

While lending to farming has traditionally been a safe-haven for high street banks, there have been measures to tighten policies in the agricultural lending market. Consequently, the decision-making processes is slow and the time taken to review a mortgage application has increased considerably, with some high street and rural lenders now taking six weeks or more to reach a lending decision. 

As farmers endeavour to diversify their income streams, there is a danger that these businesses begin to fall outside of 'agriculture' from a bank’s perspective. If this occurs then both the lending criteria and terms can, and do, change markedly. This jeopardises the funding availability and results in less than attractive lending terms. With Brexit and the removal of farm subsidies looming, the entrepreneurial and progressive farm businesses may not get the same bank support they have been accustomed to; and may, in fact, be prejudiced by their own progressive approach. 

In addition, high street banks have been cutting costs. The traditional local bank manager relationships that farmers had 15 years ago, are being lost to call centres or non-agricultural managers. The once knowledgeable ‘on-the-ground’ bank managers who could comfortably make decisions and support farm businesses of all shapes and sizes are, in most cases, only now available for the larger farming enterprises. 

What should farmers do now?

With dwindling support from local bank managers and a more cautious approach to lending, professional advice will become even more important to ensure that businesses achieve their borrowing requirements on the best terms. Preparing a robust lending proposal and approaching the most appropriate lender who demonstrates an appetite for the deal will be important. 

While residential mortgages are almost entirely on a click of a mouse, the commercial market is more complicated as no business is the same. And that’s even more pertinent in farming. However, as banks look to improve efficiency there is a move towards automated decision making in the commercial and farming mortgage market too. This will also impact on how farms should prepare and submit lending applications in the future. Any proposal will need to be presented appropriately and based on sound, solid financials.

2.    The rise of private banks and alternative lenders

When R&BS began in 2004, farmers could borrow from the high-street banks, rural lenders and a handful of secondary lenders. We were putting around 10% of applications to private banks and other lenders, and 90% of applications to the high street banks. In 2019, it’s likely to be 50/50 and looking forward, the swing to other lenders may be even greater.

The high street banks are still active in the farming market and have an important role to play. But the space is also being filled by private banks, challenger banks and alternative lenders - some of which R&BS have helped introduce to the market. 

These lenders are more flexible in their decision making and take a different approach to appraising the people behind the businesses. They look at the larger picture and the vision of the business owner, and offer better options for the entrepreneurial borrower to achieve their aims and objectives; after all that’s the purpose of borrowing capital! As such, we expect private banks and alternative lenders to increase their market share in the agricultural lending market in the future. 

What should farmers do now?

We’ve always advocated looking at all solid options. Farmers looking for finance for growth or restructuring, shouldn’t simply approach their existing lender. Other options may well suit their businesses better. 

The private banks and the high net worth divisions of the high street banks have adjusted their customer criteria, and now suit those businesses looking for deals over £500,000 with an asset base of over £2 million. They have dropped their historic “assets under management” philosophy and offer an important personal relationship with rates offered in the region of 3-6%. 

Alternative lenders provide solutions for those smaller cases that fall out of the rigid high street bank criteria or with projection-led figures. But they come with higher interest rates of around 6.5-8.5% for 3 to 7 years interest-only compared to the high street of around 2.5-6%.

Often the most appropriate lender will be selected according to the clients’ circumstances, aims and objectives.

3.    Interest rates and future predictions

Back in March 2004, the Bank of England base rate was at 4.00% rising to its peak in 5.75% in July 2007- compared to 0.75% today. (Source: Bank of England Official Bank Rate History). Some of the R&BS team were working in banking when the Bank of England bank rate peaked at 17% in the 1980s - so they consider the last 15 years as a low-cost borrowing environment! 

The Bank of England base rate is expected to remain low for the foreseeable future to allow for UK economic growth. In their February 2019 ‘Prospects for Inflation’ report, the Bank of England mapped the rate to rise slowly to 1.4% by November 2021. But with forecasts waiting on the looming Brexit transition, the rate could swing either way in 2019.

What should farmers do now? 

Opting for a fixed rate or variable rate loan is a difficult decision and should be based on the circumstances of each business and the level of stability they require. With rates predicted to remain low and stable, those businesses that fixed into longer-term rates could review their lending now, if they haven’t done so already, to see if they could benefit from restructuring their borrowing onto lower rates.  

It is, however, advisable to keep an eye on the interest rate news to ensure that if there is any clear sign of an anticipated rise in Bank of England Base Rate, that beneficial fixed rates can be accessed as these tend to increase before the Bank Base Rate. 

4.    Agriculture debt and the cash flow squeeze

UK agriculture has seen consistent growth in debt over the last 15 years – and is one of few industries to do so. In 2004 farm borrowing stood at just under £8.3 billion for 31 December. As at 31 December 2018 it stood just over £18.8 billion and touched £19.2 billion - the highest it has ever been -  in September 2018. (Source: Bank of England Agriculture, hunting and forestry industries, table RPMTBOC)

Yet, as land prices have also continued to rise, the level of debt as a percentage of the balance sheet for the industry is low, making agriculture still a preferred sector by the banks. Providing land and property as security is rarely an issue in farming, but cash availability and the ability to service the debt is the biggest challenge and which is coming under more scrutiny from lenders.

Any downturn in output prices and farm incomes puts an increasing pressure on farm cash flows – and the withdrawal of direct subsidies and any Brexit effects may increase this. Despite this, we’ve continued to see encouraging levels of borrowing to fund capital investment on farms such as land purchases, building developments, diversification and enterprise growth – all with a view to strengthening farms for the future. 

What should farmers do now? 

Cash flows for the ill-prepared could come under severe pressure - requiring more overdraft, loans or asset sales to fund the gap. It’s crucial, therefore, to plan. Produce your own cash flows for several years and identify any potential weaknesses and any funding needs that may arise. It’s also important to record the actual business performance and compare it against the forecasts, and tweak and revise the forecasts if necessary. This should be a constant exercise. 

Restructuring borrowings should be considered and particularly if there is an accumulated ‘hard-core’ overdraft. This type of arrangement can be quite risky for a business as a bank can enforce a reduction at any time. 

Fortunately, an array of short-term solutions are available, including input finance, HP/machinery finance and unsecured loans etc. However, these should be employed for their specific intended purposes. All debt has to be repaid, so remember, if you have a short-term funding requirement, ensure that you understand the route of that requirement. Just because funding is readily and easily available doesn't mean that you should take it, especially if there is a fundamental underlying problem. 

For significant and longer-term investment requiring borrowing, plans should be considered two or three years in advance to make sure that the business is in the best position to secure the finance it needs when the time comes. 

Now is as important a time as ever for farmers to consider maximising their assets. The word ‘diversification’ has been pushed around for the past 40 years or so. But with changes in planning permission regulations, Brexit implications and the present focus on agricultural technology developments, now is a good time to get advice on alternative income sources, maximising returns and the investment needed to create a farm business model equipped for now and future generations

R&BS today

After 15 years of providing successful solutions in, what has been at times, a challenging landscape, we boast a strong and expanding team of experienced associates, and we’ve developed strong relationships with over 30 lenders, from high street, to private bank and other lenders. We provide proactive, efficient guidance with tailor-made finance options for a variety of rural clients.

Whatever the property, business or client circumstances we are committed to offering only the best for rural businesses, now and in the future.