Analysis: Five simple steps to make sure you can get the loan your farm business needs
In Ireland, there are effectively only three mainstream banks lending to farmers for long-term agricultural projects such as purchasing land or farm building developments.
So it is important that any application for finance is well thought out. Here are the key steps in the process:
Step 1: Ask why are you borrowing money
In any finance application, the first task is to identify why you are borrowing money.
If it is a case of your overdraft being at the limit and you urgently need cash to keep going but you are not sure why you are tight for cash, you should immediately get a professional to review your application and farm business before going any further.
The old days of the friendly bank manager covering a few cheques because you are about to go over the limit are long gone; in fact, asking for such a favour will do your application more harm than good.
The reasons for requiring extra funding are categorised as follows:
• Working capital - finance to cope with short-term cashflow deficits.
• Short-term loans: finance repaid over a one- to seven-year term, usually for livestock and/or machinery.
• Long-term loans: finance repaid over a 7- to 20-year term, usually for land or farmyard developments.
• House mortgages: finance repaid over 15-25 years for the building or purchase of a dwelling house.
The above are bone-fide reasons to borrow money but if you are borrowing from different sources to fund deficits of cash you may need to look deeper into your business to find a suitable solution to the deficits of cash.
Step 2: Meeting the bank's 'three Cs'
If you are applying for finance it is essential that you meet the 'three Cs' in the bank's assessment of your application:
• Capacity: the application must show that the business has the ability to repay the loan. This can be demonstrated using financial accounts and financial projections.
• Collateral: the security required for the loan. The rule of thumb is that the loan-to-value ratio must be under 70pc, ie if you borrow €350,000 you must have at least €500,000 of security to back the loan, usually in the form of land.
There are exceptions to this rule but is almost universally applied in long-term loans.
Short-term loans for machinery may be secured by the machine alone, for those with good credit histories. Banks in this country do not accept livestock as security (chattel mortgages).
• Character: if you have a poor credit history, it is very difficult to get finance in the current banking climate. A history of borrowing and repaying loans is a major plus in getting a loan application over the line.
Step 3: Preparing the finance application
It is important to deliver the information required by the bank; this will avoid unnecessary delays in the processing of the application.
Here is a list of information to supply with an application for finance:
• Last three years' financial accounts.
• Farm business plan (technical & financial)
• Land schedule.
• Bank loan and finance lease schedule.
• Trade creditor schedule.
• Livestock schedule.
• Capital investment schedule.
• Key performance indices.
It is better to be proactive and ask the bank what they require as banks have differing requirements. A well-prepared application collated by an experienced consultant/adviser who knows the form of the particular bank is vital in any large applications.
Step 4: Negotiation
If you have a strong farm business and you require a large loan, you are in a position to negotiate the terms of your loan, ie the loan amount, term, interest rate (margin) and security offered.
Unfortunately, there is not enough competition between banks in Ireland at present.
This is in stark contrast to our European neighbours, where the extra competition results in lower bank margins and interest rates.
Margins today in Ireland range from 2.5pc to more than 5pc above the cost of funds.
These figures are much higher than those available between 1997-2007, where margins as low as 0.5pc plus the cost of funds were negotiated by strong farm businesses and purchasing groups.
Step 5: Delivering
The final and most important step in any loan application is delivering on your farm business plan and promise to repay the loan.
It is important to show the bank that you are delivering what you said you would do - and be proud of your achievements as this will stand you good stead in future applications.
Long-term finance can be obtained from the three pillar banks, Allied Irish Bank, Bank of Ireland and Ulster Bank; all three have specialised agricultural advisors to assist in the application process if necessary.
In respect of short-term finance there are many more options.
The three pillar banks are also in this space, but they now have increased competition from Strategic Banking Corporation of Ireland (SBCI), credit unions, Finance Ireland (via selected milk purchasers), Micro Finance Ireland, finance leasing companies and new short-term finance companies such as Linked Finance.
The attraction of such sources of finance are faster decisions, quicker access to cash and the lack of security required.
However interest rates are often higher to reflect the additional risk.
Access to finance is the life-blood of all farm businesses.
Do your research, prepare a good application and put your best foot forward - it will shape your future progress.
Mike Brady is managing director at Brady Group agricultural consultants & land agents, email: firstname.lastname@example.org
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