Finance Professionals’ Corner
We’ve asked a selection of our professional finance partners to offer insights for farmers and landowners.
Arranging agricultural finance
By Mike Lord, Head of Farms and Estates at SPF Private Clients
The current appetite for lending to UK agricultural businesses is still very strong, with several lenders active in the market, from dedicated agricultural teams in the main high street banks to private banks and specialist lenders.
As the agricultural sector continuously evolves, securing financial support is crucial to continually grow farming operations. Whether it is for purchasing new land, investing in machinery, expanding operations, or seeking other income streams via diversification projects, obtaining agricultural finance is essential. For farmers and landowners looking to access funding for these projects, understanding the application process is pivotal.
Fundamentally, the lender needs to understand how much you want to borrow, what you want the money for, how long you want it for, what security is available to the bank and, most importantly, you must prove to the bank that you can afford to repay it. To ensure a smooth and successful application, you must provide key information, including:
Financial accounts – the last three to five years of accounts, including profit and loss accounts, balance sheet and cash flow statements, all crucial for assessing the current and historic financial health of the business.
Business plan and forward projections – your business going forward may look different to the previous three years’ accounts so if there is a fundamental change, lenders will want to see how this will impact profitability and cash generation.
Indicative asset valuation – the asset valuations within the balance sheet in your accounts may be at historic ‘cost’ levels so it is essential to understand the indicative value of current land/property, machinery, livestock and crop valuations to understand the true ‘net worth’ of the business.
Existing borrowing - a breakdown of any existing lending including loans, overdrafts and hire purchase is essential to understand current annual debt commitments.
Background to the business and people – it is not just about assessing the numbers, lenders want to understand the history of the farm and people behind it to develop a relationship and understand how you operate.
Complex structures – for larger businesses with several separate companies, partnership and trusts, understanding how these all fit together is key.
Security – most lenders want to take land/property as security, so understanding the legal ownership, land registry title numbers/plans and indicative values is essential. Lenders typically lend up to 60 to 75 per cent of the value of the security. Unsecured lending is available for the tenanted sector but lenders want an ‘agricultural charge’ over the value of machinery and stock so ensure you have updated values of these.
Ongoing monitoring – if the lend is complex and subject to new incoming streams being developed, the lender may want to monitor the progress of the business via quarterly management information until the business is performing as per the original budget.
Banks are keen to lend to businesses that are improving efficiencies and funding projects which are helping businesses on their journey to net zero, by reducing carbon emissions and farming in a more sustainable/environmentally-friendly way. Some lenders offer discounted interest rates or reduced arrangement fees if you fall into these categories.
With various options available when it comes to structuring your financial requirements, discussing your needs with an independent broker who specialises in agricultural finance and can search the whole market to obtain the most suitable finance package is crucial to the success of your business. Please get in touch for more information and a no-obligation chat.
Mike Lord
07519 326098 mlord@spf.co.uk
If you need it, buy it (or lease it), using Asset Finance
By Matthew Canning, Regional Director for Agriculture, Lloyds Bank
Every agricultural business knows they need a range of assets to support their day-to-day operation. But when it comes to funding things like equipment, machinery, or vehicles, what should a business consider?
Asset Finance can help you fund what you need, and it’s something we do a lot of for agriculture customers all over the UK. Instead of paying the full amount up-front, buying through Asset Finance allows you to spread the cost over time with monthly payments, helping to manage the cost of large purchases without tying up cash – you can even use it to release money from recent purchases as well as future ones.
We’ve helped customers fund assets that include tractors, telehandlers, mowers, milking robots, sprayers and spreaders, as well as things like hedge trimmers, crop irrigators, and lots of other general farming equipment.
The key choices via Lloyds Bank
Business Hire Purchase is the most recognised form of Asset Finance and an option if you want to own the asset at the end. You ‘hire’ the asset through making regular monthly payments over an agreed period of time, and at the end of your agreement, you ‘purchase’ the asset by paying a fee to own it.
Finance Lease is an alternative option where you lease the asset without having to own it - you can simply extend or sell at the end of your agreement period. It can be used on a wide range of assets (plant and machinery or vehicles), fund up to 100% of the price, and you can choose a lease period between 12 and 60 months.
There are other options too
Green Asset Finance can offer a lower repayment rate if your asset meets our qualifying green purposes. It can be used for assets that have a positive environmental
impact like electric vehicles, solar panels, battery storage or wind turbines.
Capital Import Finance is another option to buy an asset if you need to import it from overseas. It helps manage the additional risks as the funds are only released when your supplier meets their obligations, and can fund both the initial costs and the asset over time.
Release cash from existing assets. If you’ve bought an asset using cash (or your overdraft in the last six months*) and you’re VAT registered, then we can lend you up to 90% of the value of that purchase. It’s like a reverse-engineered hire purchase, and you can repay over a period of 12 - 60 months. Once all repayments are made, you will own the asset again.
There are eligibility criteria and terms and conditions, so it’s best to visit our dedicated asset finance web pages at lloydsbank.com/assetfinance or speak to your relationship manager if you already bank with us, to find out more.
Either way, Asset Finance could be a relevant funding option for those seeking to capitalise on fresh assets to give their business the impetus it may need.
*Three months if you’re in Scotland.
All lending is subject to status. For full eligibility criteria and terms and conditions, please visit the Lloyds Bank business website. Please note that any data sent via e-mail is not secure and could be read by others.
Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under Registration Number 119278.
Matthew Canning 07771 886102 matthew.canning@lloydsbanking.co.uk
Which loan is the best type of loan to fund my growth?
By Austin Britnell, Agricultural Relationship Manager, HSBC
Market update: At the time of writing, in early September 2024, the BoE’s Monetary Policy Committee (MPC) had voted to reduce the Bank Rate for August to 5.00%, providing some relief that the nation had been eagerly awaiting. What next? HSBC shares broader market expectations of continued but cautious further easing this year and next, with a forecast rate of 3.75% by the end of 2025.
With harvest wrapping up and agriculture generally looking towards what next year will bring, there are farmers out there seeing this as their time to expand.
At HSBC we are supporting growth across the broader industry where it makes commercial sense for the client’s business and their future plans.
Growth on the farm needs to happen for a reason. For example, buying the farm next door can look beneficial to your overall asset portfolio; however, it may out strip your people capacity within the business but not justify bringing in an additional staff member.
We have several customers currently growing their businesses through a variety of debt products. Below are some examples of the situations the clients have faced and the products that have assisted their growth.
A sheep farmer looking to consolidate their indoor lambing facility. The construction of a new shed and the renovations of two existing sheds were priced and a discussion was held regarding the long term benefits of the project which gave a cost saving to the business. These savings would see the loan repaid over a 15 year period.
We decided a term loan with an interest-only period whilst construction occurred would be appropriate. We agreed a one-off application fee and the potential to fix the interest rate to give to the annual commitments.
An arable farmer taking on additional lease ground. The new expansion led to the justification of purchasing a new tractor and combine rather than outsourcing this work. The client already had the qualified staff in place to take on the additional hours required to bring harvest in hand.
Funding for the new equipment via an equipment loan allowed the client to spread the cost of the machine over a term more aligned with the payback period, rather than purchasing the equipment out of the overdraft headroom. The fees and fixed interest rate associated with this example gave the client clarity of the commitments and a workable cash flow.
A dairy farmer planning to double their herd size. With the increase in herd size the input costs such as feed and veterinary, alongside the operational expenses of power and slurry spreading were set to increase. There were savings associated with the increase in herd size, so a doubling of the overdraft wasn’t the best solution. After reviewing the position we settled on an additional 70% of the existing limit which saved on both the application fee and the annual renewal fee.
The overdraft is best utilised for expenses which will be paid back within the cash flow cycle of the business, rather than for purchasing items with a repayment period outside this timeframe. For example, some larger equipment or farm infrastructure projects.
There are many ways to finance your farm business and HSBC UK Agriculture have a full range of financing products and services, including Overdraft, Term Loans, Commercial Mortgages, Equipment Finance (HP & Leasing) to name a few of the more frequently used by our farmers. Our commitment to agriculture is enduring and we are always happy to talk to farmers about their plans and how we may be able to support them. Austin Britnell 07384 791453 austin.britnell@hsbc.com
Matthew Canning
Interest rates and borrowing - what might the next few years bring?
By Mark Ashbridge, Managing Director, Ashbridge Partners
Recent history of interest rates
Most people now recognise that the ultra-low interest rate environment of 2009 – 2022 was an exceptional period caused by the determination of central banks to save the economy, protect jobs and avoid recession. Looking forward, we expect interest rates and the cost of capital to return to their long run average, albeit at the lower end of that range.
The spike in interest rates
Although the base rate has reduced to 5.00%, from its recent high of 5.25%, many clients are still recovering from the rapid increases that have taken place since 2022. For farm and estate borrowers who might have been paying 2.00% above base, this typically means an increase from 2.10%, at the historic low, to 7.10% today which is more than a threefold increase.
The residential mortgage market
The residential mortgage market, which is sometimes able to accommodate borrowing on farmhouses and let cottages, has experienced similar dramatic increases. What might have been a 1.50% 5-year fix prior to 2022 has increased to between 4.50% and 6.00% for a comparable fix over the last 12 months.
Fortunately, the cost of money appears to have turned a corner and has been edging down since June. Residential fixes over 5 years, are now increasingly available at below 4.00% and we’ve seen best-in-market commercial fixes over 10 years at below 5.00% for our farmer and landowner clients.
An expanding market of lenders and the importance of presenting applications well
For some of our clients, the cost of money is not the most significant issue. It is often more of a challenge to find a lender who is willing to lend. However, we are finding that the pool of lenders is growing and, by presenting an application in the right way and to the right people, it should still be possible to secure the finances required. Our knowledge and lender relationships set us apart in this regard and dramatically enhance an application’s chances of success.
What will happen to the base rate in the coming years?
The SWAP markets indicate that base rate could fall materially over the next 12 months, perhaps to as low as 3.50%. This will depend upon many factors, which are as yet unknown and outside of our control. The house view at Ashbridge Partners is that this may be overly optimistic and inflationary headwinds may keep base rate above that level for the next few years.
For those clients looking to minimise their risk, the current fixed rates available appear good value. Clients who are able to accept greater risk could ride the variable rate wave or explore the option of finding a middle ground and splitting between variable and fixed rates.
Mark Ashbridge, Managing Director 07770 659553 mark@ashbridgepartners.co.uk
Martin Waite, Business Development Consultant 07513 886384 martin@ashbridgepartners.co.uk