Tips on securing your credit lines

Aisling Meehan

It is that time of year again when farmers wind down for a couple of weeks to recharge the batteries before the calving, lambing and planting season kicks off the farming cycle once again.

It's also a period for preparing financial budgets for the coming year. A recently published report by the Credit Supply Clearing Group outlines the key funding options open to businesses, gives an insight into what banks look for when examining credit applications and outlines practical tips on how to package your credit application.

The first thing it addresses is how you manage your debtors and creditors. Ways of doing this include giving clear responsibility to somebody for collecting and paying money.

Check out if suppliers such as feed companies and contractors offer discounts for prompt payment or whether payment can be made at specific times of the year.

For example, it may be possible to make your payment date coincide with the date you receive your single farm payment or during the months that your milk cheques are biggest. Identify key cost drivers within the farming business such as feed and contractor costs and seek to reduce them, even a little at a time by joining buyer groups or undertaking to buy all your feed from one particular co-op/company for an agreed discount.

The report reinforces the fact that the cheapest source of funds is often the cash within your own farming business and effectively managing cashflow may reduce the need for external funding.

After assessing other funding options available to your farming business, such as family investments, venture capitalists and State/EU/grant aid, you can begin to look at applying for credit from a financial institution. Before applying for credit and meeting with your bank manager, you should meet with your accountant to ensure that you can clearly demonstrate a thorough understanding of your farming business and its financial position and future financial performance.

The report suggests the following as key pieces of information that should be provided by farmers in seeking loans:

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•Farm accounts for the two most recent years and an update of stock on the farm.

•A farm plan prepared by an adviser setting out cashflow projections.

•A copy of the letter from the Department of Agriculture setting out the total direct payments to the farmer.

•An indication of family living expenses.

•Information on any off-farm income of the farmer and/or spouse.

•A tax clearance certificate or statement from the accountant that tax affairs are up-to-date.

•Details of the purpose of the loan, be it working capital, a minor capital investment or a restructuring of existing loans.

•Loan security. If security has been already provided to a different bank, a statement of the security already provided will be required.

•Information on other credit sources including leasing companies and merchant or co-op credit.

It is vital when approaching your financial institution that you are clear as to the type of funding that your farming business requires. The following are some of the finance packages currently available from financial institutions under the 'farm loan' umbrella:

•Farm development loans to cover the cost of purchasing land or additional milk quota, upgrading farm buildings or equipment or changing over to a different system of farming.

•Leasing and hire purchase packages to fund the cost of acquiring farm machinery and equipment.

•Farm finance multipliers which allow you to borrow based on a multiplier of your Single Farm Payment or REPS payment.

•Forestry loans to cover grant bridging and land purchase.

•Milk quota restructuring or milk superlevy loan schemes to fund purchase of quota and possible milk superlevy liabilities.

Work with your financial institution to agree the best funding mix for your farming business. Plan in advance and when cash rich put your money in a high interest bearing deposit account and when cash poor be sure to have ready access to finance. Use specific financial products instead of the farming business overdraft to spread large one-off annual costs over the year. If an overdraft is remaining in a constant debit position, consider putting that money into a loan facility which will help to reduce the farms interest bill as loans are generally more inexpensive than overdrafts.

The report states that financial institutions assess your application under a number of headings including:

•Track record: Credit history, credit rating.

•Ability: Your previous business experience in the area and your plans for the future.

•Purpose: Whether credit is needed for working capital, investment capital or expansion.

•Amount: The level of facility applied for should be realistic and cover all costs.

•Repayment capacity: The financial institution will look at other financial commitments, the source of repayment, cashflow and seasonal nature of the farming business.

•Security: The level of security required will depend on the risk inherent in the application. Personal guarantees may also be requested.

Under the code of conduct for business lending, your bank must inform you of how long the credit decision will take. Check with your bank to ensure that you have submitted all the necessary information and find out what stage your credit application is at and when a decision on your application is due. Where an application for credit is declined, your manager must provide you with the reason why the credit facility was declined. The following options maybe open to you:

•Consider re-packaging the credit application in a way that meets both the farming business and banking needs.

•Appeal the decision with the bank.

•Seek an independent review from the Credit Review Office.

It is difficult to cope when a credit application has been declined by a financial institution.

I will cover what is involved in making an application to the Credit Review Office and legal aspects surrounding enforcement of security in another article.

Disclaimer: While every care is taken to ensure the accuracy of this article, solicitor, tax consultant and Nuffield scholar Aisling Meehan does not accept responsibility for errors or omissions. Tel: 061 368 412

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