What banks look for in a diversification business plan
© wutzkoh/Adobe Stock The staggered removal of the Basic Payments Scheme and higher costs across agriculture are encouraging many farm businesses to look at different business propositions such as diversifications.
Farm businesses often have assets such as land they can borrow against, making the agricultural sector an attractive industry for banks to lend to.
Euryn Jones, HSBC UK’s deputy head of agriculture, said there was no shortage of capital to lend to the sector and farmers changing their business models were very often successful.
See also: Business Clinic: What are the insurance needs if I diversify?
At the recent Central Association for Agricultural Valuers (CAAV) conference in Oxford, Mr Jones outlined the key areas HSBC considers when assessing a business’s application to borrow money and what it looks for in a business plan.
“The objective of the borrower is to provide evidence to demonstrate to the bank that the business is likely to be successful in a volatile marketplace with changing climates and with less government support,” he said.
HSBC has an SME agriculture lending fund of £1.2bn and a green fund of £500m.
Break even and benchmarking
Knowing your breakeven point for agricultural output can help show that your business is on top of its finances.
Taking these financial figures and benchmarking against other farms then allows the business to assess how its performance compares with the wider industry and identify where cost savings can be made.
Mr Jones said: “I have never really seen anything else that has had a more positive impact on a farm’s performance and profitability [than benchmarking].
“It has such a positive impact and one does wonder why more farmers don’t get more involved in it.”
People
One key area banks look for in any application is the person they are lending to and whether they have the right technical and financial skills.
These skills include such things as integrity, capability, realism, attitude and mindset, although having a good track record also helps.
Successful farmers usually had a strong team around them, such as a support network of surveyors and advisers, Mr Jones noted.
“We are not lending to an adviser or a piece of paper, we are lending to a person or family.”
Affordability
Before submitting a business plan, the necessary cashflow, balance sheet and financial forecasts should have been made by the business.
It is also recommended to carry some “What if” analysis: for example, what would happen to profit margins if milk prices fell by another 5p/litre.
Mr Jones stressed: “It’s important to understand what impact potential changes could have on the business.”
Having an accurate cashflow forecast can also ensure the business is asking for the right amount of money.
This is important as there can be a tendency to not borrow enough or not ask for enough, according to Mr Jones.
Calculating the right repayment terms is important. If they are too long the business will end up paying more interest than needed, but if too short this can put a lot of pressure on the business and the cashflow requirement can become too onerous.
It is also advisable to have a contingency plan in case the new venture does not develop as expected.
Equity and security
For established farmers, the lack of equity is rarely a problem, according to Mr Jones, but for new entrants it can make things quite difficult.
His key recommendation for young people is to get practical experience and build up as much equity as possible, so you have got a good, strong base.
Security is important to protect the bank’s assets, but this is typically considered at the final stage, once other criteria have been met.
Environmental sustainability
Having an environmental plan can help your application stand out, with banks increasingly looking at the environmental impact of proposals.
Getting a baseline carbon footprint measurement and considering the risks to the business from flooding or drought due to climate change may aid the application.
“We want to support farmers to continue to produce food and, wherever possible, do it more efficiently and more sustainably,” said Mr Jones.
Tips for success
Farmers Weekly asked Oliver McEntyre, national agricultural strategy director at Barclays, for advice and some quick tips on how farm businesses can make their applications stand out.
Mr McEntyre said: “We need to see thorough research into a proposed diversification or project.
“This needs to cover not only the numbers demonstrating viability, but also marketing and potential demand, the skill sets of those who will deliver the project, and there also needs to be some thought given to how the diversification could impact the core farming business.”
Be thorough but concise
Have a marketing plan which addresses how the business is going to attract the necessary client base to the project or diversification.
Include KPIs
Have business-specific key performance indicators in place, such as what level of income is required to break even, what margin needs to be achieved, or what footfall and spend per visitor is needed to break even.
Check permissions
Make sure all the necessary permissions are in place. Planning is the major one, but others will apply to different enterprises.
Skill sets
It is a great strength to identify areas of skills and weakness within the management team. These need to be addressed through training or hiring in the right skill sets.
Source: Oliver McEntyre, Barclays