The world of farm finance has changed considerably in recent years. So how can farmers be sure of getting the best deal from a reliable source? Mike Rowe, former agricultural manager at Barclays and now a consultant with solicitor Stephens & Scown, explains.
What has changed in recent years?
Historically, agricultural lenders were more concerned about security on loans – something which most owner occupiers at least have plenty of. Now there are a lot more checks about the affordability of a loan – can farmers afford the interest? And that’s where difficulties tend to arise, because in the past farmers have been more concerned about reducing tax bills, so have not displayed much profit on the books. Now, if you don’t make much profit, you’re unlikely to pass the affordability checks.
Some lenders are also running stress tests to evaluate the ability of a client to service the loan if interest rates rise. Typical lending rates at the moment are 3%, but some lenders are looking at whether clients can afford it if rates rise to 7%. If you’re not making a profit, that’s going to be an issue, regardless of your capital assets.
Who is lending now?
The big banks are still lending and some of them clearly see agri-business as a strategic priority and are boosting the strength of their offering. Bank managers however do not have the same authority they used to. They may provide an ongoing point of contact, with annual meetings and so on, but the vast majority of loans need a second signature through the bank’s credit team. An experienced bank manager with a good knowledge of the sector can add real value to your business. The AMC has always had a good understanding of agriculture, and maintained more consistent lending policies than some of the banks. With an AMC loan you’re left to get on with it, which is fine if everything is running well but requires more active management by borrowers who run into difficulties.
Other sources of finance known as secondary lenders are raising their profile and may pay partners to recommend them. These tend not to have a high street presence and in some cases are newer businesses than traditional lenders. As with any new supplier or buyer, check the reputation, track record and viability of who you are dealing with.
How can I check the standing of a lender?
Banks should all be members of the British Bankers Association, while other lenders should be accredited with the Finance and Leasing Association, which has a website including a code of conduct and searchable database. You can also search for the firm’s accounts online to find out how long they have been trading and their net worth – again, it’s free and easy to do. Typically, the longer a firm has been trading the better, although this is no guarantee, and if its shares are publicly quoted that’s often a good sign.
Whenever considering a firm you haven’t dealt with before, ask for references and it is worth checking online for any other farmer comment about their experience. But beware online review sites, as you never know who has really put those reviews up – they are open to manipulation. If you deal with a financial broker or adviser they may be able to conduct background checks on the directors, or may already have experience with them.
What if a mainstream firm won’t lend to me?
If you can’t borrow money from primary lenders, you really need to question why they won’t lend to you – should you really be borrowing? If a supplier recommends you use a particular lender, ask if they have a licence from the Financial Conduct Authority to make such recommendations, and understand that they are probably on some sort of commission. That in itself isn’t a problem, but keep your eyes open.
Sometimes people need secured lending in a hurry, for example in the case of divorce or sudden financial difficulty. There are lenders who will provide this kind of short-term lending and in some cases it is the right deal at the right time but you need to understand exactly what is being offered.
Get written terms and conditions and if there is anything you don’t understand, ask for a clear explanation and get a professional to check the terms for you. Too often people in need of finance are in too much of a rush to accept what is being offered, only to realise later that it is not quite what they thought they were signing up to.
Fees can be 3% up-front, plus 3% a month, and 3% on repayment and some firms charge very high rates for valuations and solicitors. If a quick turnaround is promised, you need to be sure the right checks and measures are in place – both sides need to do due diligence checks and that can’t really be done overnight.
Be very clear on your reasons for short term borrowing and have a plan on how you’re going to repay it quickly – it definitely isn’t a long-term solution. If you are having financial problems and feel that short term borrowing is the only way out, it’s worth speaking to the Farming Community Network as they will be able to provide help and financial advice.
How can I be sure I’m getting the best deal?
It’s always worth getting a couple of quotes to compare, but be sure you’re comparing like with like. Is it an unsecured loan or secured? Is it hire purchase or leasing? The two are very commonly confused. With HP, you make the payments and at the end you own the kit. VAT is payable in full up front and reclaimed when payments begin. With leasing, it’s just a rental agreement and you will never own the machinery, VAT is charged on the lease payments and reclaimed under the usual procedures.
Finance companies sometimes present the tax relief available on machinery as a reduction in interest rate but the two are nothing to do with each other. Again, ask for a breakdown of the figures and running them figures past your accountant. This should in any case form part of your due diligence, and is vital if you are relying on tax relief to justify your decision.
Another common mistake is comparing a flat interest rate with the true annual cost or APR. The flat rate is calculated on the opening balance of the loan and applied across the whole amount for the whole period, while the APR is calculated on the reducing balance.
But don’t get too hooked up on the interest rate – focus on the value of what you’re getting. Always look at the long-term implications of any agreement, and who owns the assets at the end.
Never sign a blank finance document and always take your time to read the small print; don’t be pressured into signing quickly, particularly if the lender is new to you. And always remember – if something seems too good to be true, it probably is. There’s a saying that ‘nothing in life is too expensive, it just might be that you can’t afford it’.