What farmers need to consider when trying to secure finance

Despite the current drop in cereal, milk and beef price, the scarcity of available land continues to drive the land values onwards and upwards. This coupled with a difficult lending environment, makes growth a challenging prospect for some farmers. Rob Bishop, Director of Woolley & Wallis Finance, looks at the lending environment and what farmers need to consider when trying to secure finance.

Farmers remain the primary purchasers of farmland in the UK, but this expansion now requires a greater level of funding support than ever before with the land market remaining very buoyant due to the continued demand for property and the scarce supply.

Whilst Banks like lending to farms as they are generally a safer bet than other businesses, they are nevertheless becoming more demanding in terms of information required of an applicant due to today’s stringent lending criteria and ever increasing regulation. It has never been more important to find the right lender and to approach them with the right information. Farmers need to address a number of questions before they approach a lender for finance to increase their chances success.

The first step is to find a lender and manager that specialises in farm finance; often who you approach within an organisation can make a big difference. High street lenders are not all sensitive to the needs and peculiarities of the farming industry such as seasonal cash flows, weather and commodity risk, and not all take comfort in the often substantial current assets of stocks and livestock which can often be as valuable as the land offered as security. 

All loans involve some level of risk.  A lender needs to determine how much risk they are willing to take to give a loan.  The business plan, financial projections, or other documentation you provide helps the lender evaluate the risk.  They will expect you to have a sufficient understanding of your business to provide them with information to assess:

• Profitability: provide profit and loss accounts for the last three years. Be prepared to explain the trends in turnover, costs, valuation fluctuations, any unusual transactions, drawings, capital introduced and cash generated. What are the cashflow projections? If it is a new business, what is the projected profit?  Can the business afford the debt repayments and has it accounted for unexpected expenses such as price fluctuations, broken equipment, crop failure or livestock movement restrictions like TB. Having done the projections and compared them to historic performance the business will need to demonstrate that the loan is serviceable at rates of 6-7% as banks stress test proposals.  Despite the fact that you can potentially currently borrow money on a 25 year term at around 3.5%, responsible lenders will want to know you can afford the debt at historic rates.
• Equity:  lenders like to see you invest your own cash as well to have “skin in the game”; where is that contribution coming from and can you evidence it? What other external finance or income do you have available
• Character: your personal credit worthiness and character can count for a lot in reassuring a lender that the loan is a safe risk. For example does your credit report show that you have made other debt payments on time? What are your qualifications and experience? Do you understand how to market your product?
• Business history: this might include details on how long the business has been operating; a description of the premises; equipment and labour; terms of current supply contracts and current business strategy. Presenting your business plan is an opportunity to tell your story and explain how you will run and grow the business as well as considerations for succession planning or an exit strategy.
• Security: if the business fails what collateral is available to repay the loan?

When it comes to agricultural finance, specialist knowledge is vital for developing a robust plan and delivering a positive outcome. Woolley & Wallis Finance Limited have been trading since July 2013 and acting as Brokers have to date secured circa. £35m of funding for farming businesses. If you would like to discuss a funding requirement or get a second opinion on the support offered by your banker please contact Rob Bishop for a free initial appraisal.