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A silver lining in financial clouds

The unprecedented downturn in almost all farm commodity prices last year, coupled with the significant delay in farm businesses receiving their Basic Payment subsidy income, placed a significant burden on cash-flow and many farm businesses had to make calls to their banks.

Originally from Rural Matters Issue 1, released summer of 2016.

Relationship managers were being asked to approve capital repayment holidays on term loans or increase overdraft facilities.

Every farm business is different, but there are general principles which, if followed correctly, can help when seeking further financial assistance from banks. The first and most important is up-to-date accounts. Credit departments will always insist on accounts being provided for the last three years, and they may defer a decision if these are not up-to-date. Historical accounts may not necessarily tell the true story, especially during a downturn, such as the dairy industry is suffering at present, but other useful management information - such as projections, budgets and cash-flows - will provide a bank with the comfort that the business is being well managed under difficult trading conditions. 

It is worthwhile always being aware that overdrafts are short-term callable loans, and if there are core borrowings contained within an overdraft which have accumulated over a number of years, it may be sensible to restructure these into long-term loans. There may also be merit in seeking an interest-only period while cash-flow is tight.

Owner/occupiers have the added benefit of being able to offer security, but tenanted farmers may be restricted to a level of borrowing equal to their farming assets and this will have proved extremely challenging while subsidy payments were delayed during the first quarter of 2016. Most banks have openly offered facilities to compensate for the delay, and the Scottish government has also provided a similar facility.

Many farmers are now looking at long-term fixed rates, and the big question is whether to fix or not.

There are some attractive options, but you must be prepared to take a long-term view of your business. If you wish to repay either part or all of a fixed loan early, significant breakage costs may be incurred. There is certainly an element of crystal ball gazing to be done. Predictions made in 2011 and 2012 that the Bank of England base rate would be 2-2.5% now have proved completely wrong. So the big question is what are they now predicting, and will it be accurate? The past few months certainly suggests no immediate change in the market.