Business Clinic: What you should look for when moving banks

Whether you have a legal, tax, insurance, management or land issue, Farmers Weekly’s Business Clinic experts can help.

Here, Alastair Johnston from Savills Rural offers advice on what to look for when changing banks.

Q I am planning to borrow some money for a new livestock building and am thinking about changing my business banking to get a better borrowing deal. What should I be looking out for?

Alastair Johnston
Farm consultant
Savills Rural

A Despite the security of rising land prices, the ability to service and repay borrowing is increasingly important.

Those looking to move banks should set out how much will be needed, for how long and why, accompanied by a good cashflow forecast and budget.

This will need to demonstrate sensitivity to input and output price changes along with technical yield and output fluctuation.

When considering moving banks, think about overall cost, not just headline lending rates.

Fees will be charged that might cover arrangement, valuation, bank security, security release (existing and future), early repayment charges from the existing lender and new lender, as well as legal costs.

The bank might want its legal team to check the borrower’s solicitor’s work – which could be at your cost.

See also: Planning for late BPS payment

Many lenders impose performance conditions known as covenants on the borrower’s business. Typically these tend to be profit and balance sheet related. The loan is dependent on these being met, so failure to do so can result in the facility being withdrawn.

Examples of covenants include:

• Interest cover Any profits before interest and tax must not fall below a set figure equal to a certain percentage of the interest charged in that accounting period – this includes all interest charges on hire purchase and all loans. This ensures that the business can at least cover interest payments on the loans from business profits.
• Minimum net worth The tangible net worth of the business must not fall below a certain value set out by the lender, as this is the base figure on which the loan has be calculated.

Breach of a lending covenant enables the bank to have a discussion with the borrower about the future of the loan.

High street lenders’ arrangement fees can vary from 1.5% for the very best business (with, say, security cover) up to 5.5% of the loan amount for a weaker business.

These fees are dependent on factors including business profitability, security being provided and account conduct.

As well as the arrangement fee there is also the interest rate that will be charged on the loan. Some banks lend against the base rate while others use the London Interbank Offered Rate (Libor), which can differ from the current base rate.

Where fixed rates are being considered, the cost of funds (the base from which the loan starts) varies between lenders and much depends on how the early repayment penalty is calculated – for instance, a known amount from the outset or a penalty linked to market rates at the time.

Great care is required in ensuring the small print is understood. Added to the cost of funds is a lending margin. Recently, for a 20-year term, the margin range has probably been 1.75-2.75% depending on the market and how any penalty is calculated.

Fixed rates provide the security of a known cost but can carry significant break costs to get out of the deal. Farming is a volatile industry and outside influences such as the “three Ds” – death, debt and divorce – can enforce a business change.

Some lenders offer facilities for five or 10 years as this reduces the amount of capital the lender has to hold against the loan.

Others will offer a 30-year term without conditions. Some lenders want monthly management information, while others don’t.

When moving lenders, day-to-day banking housekeeping such as transfer of direct debits and standing orders are handled by the banks as part of an agreed switching service.

However, you will need to remember to inform other parties such as HMRC, and sources of seasonal or one-off income such as BPS, ELS or HLS payments.

Once an account has been moved, the only annual fee should be the arrangement fee on the overdraft facility.

It is vital that you get the bank to detail how any fees or charges are arrived at – arrangement, interest rates, penalties and annual overdraft facility arrangement fee.

Keep your bank informed about your business. Build the relationship with your own bank but get others on to the farm too and use them as a sounding board.

Once you have seen a range of banks it is up to them to come back to you with a proposal – if they are keen to win your business there will be some flexibility.

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You can also email your question to fwbusinessclinic@rbi.co.uk or post it on the Farmers Weekly website.