How farm businesses can borrow wisely

Farmers Weekly is occasionally contacted by farmers in financial difficulty after taking on additional borrowings.

These stories are difficult to report because often it is possible to have only one side of the story, unless cases have been litigated, which is rare.

However, the situations that come to our attention usually share some common threads.

See also: Advice on managing borrowings and their costs

Often, but by no means always, they include having had difficulty in obtaining borrowing or additional facilities from traditional or conventional lenders.

In some cases farmers have turned to alternative sources, to their cost.

The farmers concerned are often already heavily committed in borrowing terms, they have assets but little cash and usually have taken little or no advice on funding options.

Also, they are usually under time pressure. In some cases short-term borrowing is taken on the assurance that a long-term facility will follow, but this does not always materialise.

The result is punitive interest charges and sometimes penalties as the short-term facility rolls on.    

The NFU has seen an increase in issues associated with borrowing and is helping some members deal with these, referring them to its panel firms of solicitors for advice.

Alternative funding sources

The union says a number of factors combined with the financial pressures presently on farming is leading to some seeking financial support from areas they would not have done previously.

“The nature of some financial products on offer to farmers and growers who have severe cashflow issues are a growing concern, and in some situations farmers have lost everything due to these arrangements,” says James Clark, director of communications and external affairs at the NFU.

“We are both supporting some individual members in this area through the NFU’s legal assistance Scheme, and looking more widely at the legal frameworks around this kind of lending to understand if changes in regulation(s) are needed.

“We can’t comment on individual cases, but in the main this kind of lending tends to attract those whose cashflow crisis is most severe, or who feel they have fewer options for lending in the wider market.

“In some case, this could result in farmers losing their farms, homes or machinery if loans are secured on goods or land, or if they have entered a sale and buy-back arrangement.”

Unregulated lenders

Most of the finance organisations involved are not regulated, says James.

“We think this issue affects customers in sectors well beyond farming and growing.

“We also need to work with other financial organisations to raise awareness of these issues to see if there is anything more they can do to stop this from happening by offering alternative lending arrangements for farmers.”

At HCR Law, agriculture and estates partner Matt Hayes says: “There is sometimes an assumption that the existing lender will renew a facility, but the options can become limited, especially if a problem is ignored.

“Take stock and look at the opportunity to restructure – farmers don’t like selling things (assets) but sometimes this is a sensible option.

“There are tools in the box, but they haven’t necessarily been used – security can be revalued, although that can go both ways.”  

Law firm Thrings is a member of the NFU’s legal panel. The firm’s head of banking and finance, Mike Tomlin, says that borrowing across all sectors has grown as confidence is growing slightly.

Farming is no different, but that confidence remains fairly fragile, says Mike.

Problems can be difficult to show after the fact, so it is important for borrowers to understand at the outset what the terms of the loan are and what the longer-term plan for finance is, he says.

“Take care to understand what is being offered, and what is asked in return. In particular, look at the security you are being asked to give – especially things like personal guarantees or security over property.

“Farming businesses are often unincorporated, and so personal assets such as the family home are potentially at risk alongside the business assets comprised in the farm.

“While farming businesses generally won’t benefit from the full protection of consumer credit legislation because they are borrowing as businesses rather than consumers, all professional lenders are subject to certain requirements around contract terms being reasonable, not including penalty clauses, and so on.

“However, this doesn’t mean that they can’t charge different rates of interest, or require different types of security.

Short term rates

“Shorter-term facilities will often mean higher rates of interest than you might get from a longer-term lend, and there are often other fees payable, such as arrangement and/or exit fees.”

Borrowers should where possible also understand what the lender’s intention would be if they are not able to arrange refinancing in time for the loan to mature, says Mike.

“Some of these loans do work well in covering a short-term funding gap, but where there are problems they usually arise out of the borrower not being able to secure a replacement lender in time.

“In those circumstances, the borrower is in the hands of the short-term lender, unless there is some problem with the terms of the short-term loan (for example, the security hasn’t been taken properly because it hasn’t taken into account the fact that family members who are not themselves owners of the business live in the farmhouse; or there are financial penalties or fees in the facility which have not properly been brought to the attention of the borrower).