Advice on managing borrowings and their costs

A good proportion of the bare land blocks currently on the market are there because of the need to reduce debt.

The latest Bank of England figures show that agriculture and forestry businesses were actually borrowing £428m less at the end of May this year than at the same point in 2023.

They were using roughly the same proportion of the facilities available to them in both years, at about 86%.

See also: 15 fresh ideas for making money or cutting costs on farm

However, the overall picture hides the growing gap between those in a secure financial position and those for whom things are more difficult, and banks are taking a harder line with some of the latter. 

“The gap is masked and there will be more farms come onto the market next year,” says consultant Richard Price of Ewematter.

“There’s a lot of worry out there, but support is available and it’s crucial farmers talk.

“A number of banks are steered from a general credit department, so not all are treating farms and rural business individually. It is imperative that banks really understand farming and have a handle on all of the pressures on a daily basis.

“Some are taking a harder line, others see the longer term prospects and benefits.”

Good business planning

Accurate business planning is vital to progress, say advisers. While this is not a new message, they stress it is more important than ever so that cashflow and borrowings can be managed.

“Be true to yourself about what is profitable and what is not. Be in control, don’t let the banks determine your position and future,” says Richard. “Give the bank confidence that your hands are on the steering wheel.

“Working with a bank that understands agriculture and your business is crucial, but you have to make the move to communicate as well.

“Banks tend to react when there’s a problem if the communication isn’t there.”

He suggests finding out the correct bank contact for your business and asking for a farm meeting to explain your aims and objectives. “Have some independent support to help with these meetings,” says Richard, who outlines other steps that can help business managers gain more control:

• Ask for some help, look at grants available for courses, take advantage of free advice
• Locate some admin support, even if just for a couple of days a month
• Install some systems so management decisions can be made based on what’s happening, not just what it is thought is happening
• Set up a succession plan, so that the bank knows your thoughts for the future, even though some parts will probably change
• Hold and minute monthly family meetings, so that all family members and partners know what the other is thinking
• Discuss future enterprises with the banks and feed back any issues – the bank might be able to help more than you realise
• Speak regularly to your accountant
• Bring in external help to discuss future options, so all bases are covered and the bank knows that you are prepared to seek help
• Consider membership of professional organisations to widen your skill set and contacts – for example the Institute of Agricultural Management runs a management skills programme annually.
• Structural change.

The farming environment is changing more rapidly than ever and with financial volatility this is, in some cases, revealing the performance gaps, says Simon Bennett, a partner in Wiltshire consultancy firm AKC.

“BPS enabled some businesses to maintain the status quo,” he says, “especially where they were not taking high drawings or looking to reinvest.

“Now they need to look at which elements of the business are performing and which aren’t, and whether there are alternative systems or use of assets.

“Structural change is not dramatic at the moment, but a more critical eye will be needed, for example on the cost of rented land.“

“More than ever there is requirement from lenders for reporting on cash flow and budgets with a clear business plan and a strategy so that they are kept well informed to be able to support the business.”

Progressive tightening

Banks generally use the same criteria to assess lending, but these have become tighter, with much greater scrutiny of budgets, says Douglas Green, of Douglas Green Consulting.  

“The criteria are largely driven by a move away from overdrafts,” he says.

“Overdrafts require a huge amount of due diligence work by the banks. They have to park more reserves against overdrafts than loans.”

The desire by banks to move core borrowing off overdraft has seen equipment moved to asset finance agreements, for example, says Douglas.

He sees arable businesses on poor soils, and some dairy operations, as the most challenged at present.

The margins charged by banks have generally reduced slightly, putting most borrowers at two to two-and-a-half percentage points over base rate, whether for variable-rate loans or overdrafts, although overdraft rates are slightly hotter than for loans, he says.

“But with overdrafts you’re also paying a 1.5% annual arrangement fee on the whole facility, not just on what is being used.”  

This pushes many towards a 9% rate. “That makes one think hard about debt and holding assets,” says Douglas, who also sounds a warning on the need for careful cashflow planning when restructuring borrowing. 

For example, when moving “core” overdraft borrowing – that which otherwise would never leave the overdraft – onto a loan, the business needs to be able to find the cash for both the interest and capital elements.

Good bookkeeping and cloud-based accounting is essential, says Douglas, so that good information is quickly available to help manage the business.

There are some keen rates in the market and lenders interested to take on new business, he says, although a huge amount of preparation is needed by businesses looking to move.