If there ever was the time to invest in a serious long-term project, this might be it.
Back in the 1980s, it used to be said that if the cost of borrowing ever came down to 10%, that was the time to “fill your boots”, Barclays head of agriculture Martin Redfearn told a recent Midland Free-Range Discussion Group meeting. But now it was half that rate, with five-year money available to the industry at around 5%.
“Has anybody borrowed money at 5% in their lives?” he asked. “If you can afford it on the basis of a business plan, this has to be the time in everybody’s lives when they’ll look back and say, ‘I wish we’d had some more when it was that rate’,” he said.
However, any lender would also be asking if the project would stack up with the cost of money at 5%: “If it can’t, it isn’t a project. And more importantly, can it stand money at 10%, if you don’t fix the rate today?”
The process by which bankers made their decisions was a mystery to most people, he said. “Actually there’s very little to it. It’s not a science, it’s an art.”
One system bankers used to assess lending propositions was the CAMPARI mnemonic, of which the first item “C” stood for “Character”.
C – Character
A – Ability
M – Means
P – Purpose
A – Amount
R – Repayment
I – Insurance
“People make things work. There is nothing more sure than if you forget the people, you’ll make a wrong lending decision. If somebody comes to us and says ‘my bank doesn’t understand me’, we ask ‘why not?’. A bank will not deliberately misunderstand farmers.”
This was because agriculture was a “very, very competitive” industry, and every lender wanted a piece of it, he said. Not simply because farmers had assets, but reflecting the fact that, when bankers lent to agriculture, they could be confident they would get it back.
When it came to assessing “Ability”, track record was every thing. “What have you achieved? Where have you been? What have you done? That’s what we’ll be looking at.”
Being able to demonstrate an understanding of the business was critical. “It’s not the case of just putting up the unit. It’s putting in the flock, knowing they don’t generate eggs on day one and in the meantime you’ve got to feed them. There is a cycle involved and your understanding of all that is vital to us.”
The “Means” to repay the loan was covered by the business plan, Mr Redfearn explained.
“We need to understand the business plan and we need to know where the numbers come from. How much electricity and at what price? How many labour units and at what price? We get lots of spreadsheets, but we don’t always know where the numbers come from.”
The next step was to turn this financial and physical information into a profit forecast and cashflow forecast.
“The success of the business is measurable by two flashbulbs: the balance sheet at the start of the year and the balance sheet at the end. That’s the financial health of the business and the difference between the two is profit or loss.
“What I need to know is how you get from the one to the other. That’s how you get the message across to us that your business is the right one to be lending money to.”
‘P’ was for “Purpose”.
“We want to know what you’re borrowing the money for. Is it for some kit, a shed with enriched cages, for example? You might think you’re buying an asset, but is it really an asset or just a very expensive way of producing eggs?”
The bank wanted to know what it would actually be worth if the producer defaulted on the payments? “All we’ve we got then are some concrete blocks and bits and pieces, with some chickens in them.”
Knowing how much to borrow – the “Amount” – was another key ingredient.
“One thing we often find troublesome is those customers who have an established business, and then have a bad flock and find they need to borrow a bit more.”
The vital step was to tell the lender in good time and to know how much they needed. “The last thing bankers want is surprises, and the last thing they need is to renegotiate an overdraft three or four times a year.
“If you get it right, it’s not a problem. If you get it wrong, we start to wonder ‘Is this person in control of this business, or is it the other way round’?”