Borrowing update: Has Brexit hit lending to farmers?

Farmers are increasingly uncertain about what agricultural produce will be worth in future.

This is causing difficulties for businesses to generate accurate forecasts to satisfy lenders that they are fit to borrow money.

Farmers Weekly spoke to Andrew Greasley and Rachel Barnett of Knight Frank’s agri-finance team for an insight into the latest market conditions on borrowing trends, along with tips on putting together a solid application.

Trends

Q: Are lenders becoming more risk-averse because of Brexit?
No. Private banks and lenders are still very open to proposals with a low loan-to-value (LTV), from trusted clients and with a well-structured plan. But rates will reflect the risk, with offers for riskier proposals and tighter LTVs costing more like 4-5% on a variable rate.

Fixed rates are currently slightly lower than variable rates and a proposition with lots of assets and good income prospects might be able to secure a loan at 2.5%.

Q: Have you seen an increase in the number of businesses choosing fixed rates to offset Brexit uncertainty?
No. Because no-one knows what will happen, people are not fixing long-term rates and instead are opting for flexibility.

See also: Business Clinic: expert advice on readers’ management, tax, legal and insurance questions  

Q: Are you seeing many businesses putting large capital investment projects on hold?
Absolutely. People don’t know what will be profitable in six months’ time so clients are putting large projects on hold. The banks and lenders are ready to lend but it is the clients who are waiting.

Q: What are the trends in rural business borrowing over the past five years?
Despite the current uncertainty, farm and estate borrowing requirements have largely remained unchanged.

There is always a demand for investment in restoration, machinery purchases and renewables, but a stand-out trend has been a move towards multi-generational borrowing and refinancing.

A lot of borrowers are now over 60 years old and are securing long-term loans of 30 years.

In these cases, lenders appear to be taking an open-minded approach to finding a debt structure that reflects succession plans and the long-term viability of a farm or estate.

Tips on applying

Q: How do lenders assess borrowing requirements?
Lending is based on detailed, individual plans that take an holistic view of the farm or estate and is no longer just a box-ticking exercise.

Lenders will look at short-, medium- and long-term plans, asking what the aims of the proposal are. The value of assets, current income, income potential and who is managing the farm or estate, are all factored in.

Succession is also increasingly judged, with a move to loans that span several generations.

Q: How can potential borrowers improve their chances of making a successful application?
It is very much down to the individual proposal but the estates and farms that are more likely to be successful have:

• clear, well-thought-through, business plans, presented professionally
• access to the best banks and lenders
• diversified income streams
• defined succession plans
• support and evidence from professional advisers, consultants and accountants
• contingency planning in place – for example an alternative energy venture should set out what would be done if incentive payments changed
• ensured their credit file is up to date and cleaned of outstanding issues – small amounts can block a loan offer and cause delay
• a residential property element.

Q: Why is residential property a key factor?
Generally speaking, the more residential property you can include in a proposal the better.

That is because lenders often know the residential property market better than farming, so tend to favour proposals that include bricks and mortar.

The loan rate will also always be determined by the asset. It is possible to get a good deal with land only, but putting residential property into the mix should attract a better rate.

Q: What loan-to-value limits are generally being used?
The maximum LTV is typically 70%.

Q: What terms and conditions on the loan should be considered?
With the uncertainty over Brexit and a potential no-deal, flexibility is key. Clients should weigh up the benefits of fixing low rates versus the potential early repayment charges these may carry.

Conditions may be placed on the loan to ensure that business plans submitted in the application are actually carried out. These may include covenants on performance levels.   

Q: What fees or costs are associated with arranging a loan?
The lender’s fee is typically 1% of the loan amount.

Q: What about security?
When structuring a loan, full advice should be taken from a qualified tax consultant on this and other aspects, such as any tax implications or the merits of using certain assets in place of others.

It will be important to establish the correct structure for how the security is held, for example, under personal name, a limited company, or a trust.