Farmers should consider whether flexible or long-term loans might be a better way of managing their cashflow during volatile times than a traditional overdraft.
Robert Taylor at CKD Galbraith said increasingly volatile markets may mean farming businesses that are highly seasonal or have long profit cycles will need to think differently about managing their cashflow in the future.
“This greater level of volatility in agricultural markets is going to be normal,” he said.
£250,000 borrowed at a notional 4.5% interest rate on a 20-year annuity would mean a representative monthly repayment of £1,582. As a 30-year annuity it would represent a repayment of £1,267/month; and on an interest-only basis, £938/month.
Source: CKD Galbraith
“So farm businesses whose profits come in on a seasonal, annual or even longer-term basis are facing a greater risk of hitting markets at sub-optimal times.
“While better market highs could well balance out profits in the longer term, some businesses may end up waiting two or three business cycles to see returns come through.”
Mr Taylor said such businesses would end up funding increasing amounts of their working capital through 12-month annual overdrafts, which could not provide the certainty and buffer needed.
“Instead, shorter-term cashflow needs would be better covered via a flexible loan spanning several years than an annual overdraft, which could find markets largely unrecovered in a 12-month period,” he said.
It was important to talk through the options with an independent financial adviser before making any decisions, he said. But another measure to ease cashflow pressure could be to take out longer-term or interest-only loans.
“We find our clients can be inclined to pay off term loan borrowing as quickly as possible. But at current interest rates, taking a longer-term loan with lower monthly charges could be a very practical step to take to reduce the cashflow cost. Equally, a number of lenders offer interest-only loans where you pay back the capital when funds allow.
“So borrowing £250,000 over 30 years rather than 20, or even borrowing on an interest-only basis would keep monthly repayments low – especially with the rates you can fix now. In difficult times, like now, this means you are putting your business cashflow – and yourself – under less pressure.”
The advice echoes warning from consultants Brown and Co, which has predicted that arable farmers are facing a tough eighteen months in terms of cashflow.
Forecasts for its model arable 386ha farm, published earlier this year, suggested poor market prices would see it breach its £300,000 overdraft limit, which it said might be worth securing with a long-term loan.
This could be fixed at about 4% for 25 years, depending on existing gearing, which would probably be slightly higher than the overdraft rate, but would reduce risk.