Managing your banking relations can be crucial
Many business people depend on their bank to provide them with the finance required to run their business. Farmers are no different. Undoubtedly the level of credit available to Irish businesses has diminished significantly over recent years and credit is difficult to get.
The wider domestic economy is suffering at the hands of the current recession -- even relatively healthy agri-businesses. Sound banking relations are required in these difficult times to help farmers weather the storm.
For existing loans you have drawn down it may be pertinent to consider the following:
- If you have debt on an interest only basis and are considering making capital repayments you might consider your options in this regard. If you think your farm will require debt finance in the future, consideration should be given to maintaining the existing debt which will improve your cash position. Credit may not be forthcoming when required.
- If your existing bank debt is on favourable terms (e.g. a tracker rate) care should be taken to ensure the covenants of the loan are not breached which may allow the bank to hike the interest rate or impose some form of penalty.
- Where possible the use of expensive overdraft facilities should be avoided. Consideration should also be given to converting existing overdraft facilities to a term loan.
If you are unable to meet your repayments you should meet with your financial advisor. The bank should then be approached to seek a compromise arrangement that you can work around. Don't bury your head in the sand.
There are three major factors for the banks to consider when making a new loan, namely, the financial viability of the proposal, track record and security. The proposal is the factor on which most work can be carried out and how you present your proposal to the bank is crucial. In this regard you should have the following information to hand:
- A business plan;
- Financial projections;
- Current management accounts;
- Information of any off-farm income.
Time spent preparing and perfecting this information can create a positive impression and improves your chances of obtaining a loan. With regard to banking security, this was an area where borrowers became particularly lax in recent times with people offering personal guarantees from themselves and their family. The fallout from these arrangements can be seen in the courts with increasing regularity. Great care and consideration should be given to what security is given to the bank for any loan. The worst case scenario where the farm is offered as security and the security is eventually enforced must be contemplated by the farmer. Competent legal advice should always be sought.