Management vital to avoid poor prices creating long-term pain
Published 18/05/2016 | 02:30
Farm debt can take many forms such as bank loans, hire purchase, co-op or merchant credit, personal loans and general creditors. Many younger farmers may also have a house mortgage. Generally in my experience farmers are top of the class at meeting their debt commitments and it is only in rare circumstances that I have seen a farmer to default.
However, I am old enough to have been around in the Eighties when farmers in large numbers ran into financial difficulties due to a combination of low beef prices and high interest rates.
Nearly every farmer survived that awful period but only after the problem was taken in hand by the government by making available cheaper foreign currency loans, the farm advisory services and the IFA which brokered many a good deal on behalf of troubled farmers with the banks. If we learned anything from that period it is that the involvement of all the stakeholders proved to be the solution. Thankfully we do not have an interest rate crisis today but we do have a serious grain and milk price problem that has the capacity to inflict serious long term damage if not properly managed.
Dealing with a short to medium term problem
How the total farm debt is managed can have a major bearing on farm cash flow and overall farm profitability - not to mention the mental wellbeing of the farmer and his family. In the current period of depressed commodity prices coupled with a difficult spring, farmers will have to apply a greater diligence to managing their finances in order to preserve cash flow and keep their heads above water.
Good debt management not only can save money but can also bring peace of mind. Avoiding costly and short term credit, if at all possible, is the first step in good debt management.
Many farmers are currently coming under increasing financial pressures and addressing the issue in a realistic structured way is vital - as short term remedies, or worse, burying the head - can be disastrous.
In my experience it takes two years to recover from one bad year and unfortunately dairy farmers are heading into a second year of depressed milk prices with little or no light on the horizon. Addressing and assessing your position now is vital. Get a three year financial appraisal done and then talk to your bank. If ever your advisor, consultant or accountant was to earn his or her keep, it is now. If they cannot deliver the goods seek out one that can. Be assured that this difficult time will pass but your actions now can determine what shape you will be in when you come out the other end.
Good overdraft management
In difficult times the current account is generally where the first symptoms of financial pressure emerge. An overdraft facility, if properly managed can be a very valuable tool in ensuring that short term cash flow pressure points are surmounted. However, an overdraft facility if not properly managed can be a very costly form of finance, typically 4-5pc above term loan rates. Add to this the penalties that are imposed on returned payments not to mention the associated stress.
In the past, the banks, particularly in the case of long standing customers, allowed accounts to exceed limits and imposed only a modest penalty but that day is more or less gone as it is the computer that is now watching over your account. Furthermore, how you manage your current account may be used as an indicator of your general credit worthiness when making an application to a different bank. Typically the new bank will look for your last six or 12 bank statements and bounced payments will set the alarm bells ringing. An overdraft facility should be used solely for the purpose of dealing with the seasonality of normal income and expenditure - not as a means of funding capital or once off investment. The good management rules of an overdraft facility can be summarised as follows:
* Only use it for its intended purpose of dealing with the seasonality of income and expenditure.
* Never ever exceed the permitted limit.
* Ensure that you achieve 30 days in credit.
* Ensure you actually make use of the overdraft facility as the bank may withdraw or reduce it. You may need it in the future.
* Use it as sparingly as possible as it is a costly form of finance or indeed opt for a cheaper alternative in the form of a seasonal loan.
This is the first in a two-part series on debt management
DOS AND DON’TS OF DEALING WITH PROBLEMS
Take early intervention - seek advice as soon as you see a problem emerging
Face up to your debt problem - ignoring it won’t make it go away
Inform and involve your spouse - a problem shared is a problem halved, they will not thank you for not involving them
Understand your problem - produce prices may not be the primary reason why you have a debt problem
Take independent advice - not from the representative of the bank or co-op to whom you owe the debt
Have up to date farm accounts - a meaningful and timely proposal to the bank will be useless without up to date accounts
Take a minimum of a three year view - short term plans will yield short term solutions
Be up front with your banker — make him/her aware of essential expenditure likely to arise in the short to medium term
Don’t accept the suggested remedies of the bank or co-op without seeking independent advice
Don’t talk to the bank without first having a well thought out and professionally appraised set of proposals
Don’t sign any document without seeking independent advice on what you are signing and the rate of interest being charged
Don’t ignore correspondence from your banks and creditors - maintaining a good credit rating is vitally important