9 April 1999

Dont increase overdraft limit to repay loans

In the final part of our series

on controlling overhead

costs, Jessica Buss finds

out how to take the pressure

off rent and finance

NEGOTIATING longer term loans and shopping around for the best rate could ease the financial pressure on many dairy businesses.

Axient consultant Garry Kidner says many dairy producers borrowed to invest in land, buildings and quota in higher profit times and capital repayments set then are now too high. These producers are suffering and are unable to keep up loan repayments without an increasing overdraft.

This is stopping some increasing stock numbers further, when doing so would increase profit and the ability to repay capital.

"It is difficult to expand quickly enough to cover the drop in income," says Mr Kidner.

When this is the case, it can be difficult to cope mentally, while the bank manager will also be concerned about an increasing overdraft. "However, some loan agreements allow early repayment with little penalty, and because interest rates have fallen, negotiating a new loan may be cheaper.

"We used to think a 10% fixed interest rate was good, but now rates are lower."

Also consider other lenders. "Some may offer a short period of interest-only payments, allowing a capital holiday during which you can build up the business and finish paying off hire purchase loans."

Spreading loans over a longer period can also help. For example, a unit that a few years ago borrowed for a new building on a 10-year loan and has bought milk quota on a five-year loan, can reduce loan repayments by re-negotiating a 15-year loan on both amounts combined. Putting both amounts on a single loan overcomes the banks concerns over quota loans that may outlast quota.

But check the small print on agreements and phone the lender for confirmation of early repayment penalties before restructuring loans, warns Mr Kidner.

Although interest payments on new loans may last longer, when you are unable to pay back capital from profit the overdraft will increase and that often has a higher rate of interest than a loan.

"Banks may initially let overdrafts increase, but wont let them go out of control. They will want to put borrowing on longer term secured loans. But that will mean paying off capital which is what many producers are short of."

Look for flexible loans which will allow you to pay off some capital when you have an excess. And consider putting half a loan on a fixed rate for security and half on variable to take advantage of falling interest rates, he says.

Hire purchase agreements for bulk tanks and machinery are also putting businesses under pressure. "But early repayments often mean a high penalty because interest rates are set at the start, so its usually best to continue with them."

Banks will offer best interest rates on overdrafts to businesses with the best track record and profitable past accounts.

"Offer the bank manager a clear forward plan and it will be easier to negotiate a lower interest rate. Manage your bank manager rather than letting him control you." Then ensure he quotes an annual percentage rate (APR) interest rate because a monthly one may work out more expensive. And dont forget to shop around the different banks for interest rates and bank charges.

&#8226 Keep control of overdraft.

&#8226 Shop around for loans.

&#8226 Consider spreading loans.

&#8226 Beware of buying what you cant afford on 0% interest agreements. Interest has been included, as is revealed when a cash discount is offered, says Garry Kidner.

&#8226 Consider selling excess machinery, cottages and small parcels high value land, such as garden extensions, to generate capital.

&#8226 Reclaiming VAT monthly and on invoices rather than payment date may bring in cash for short-term use. When large purchases such as fertiliser are made, reclaiming VAT monthly can help cashflow at a period when outgoings are high.

&#8226 Selling shares may make capital available to help run a business more profitably. Mr Kidner says that selling Dairy Crest shares and spending the money on quota may be more profitable.

Time is right to request rent review

TENANTS should look at how to contain and reduce rents, and when possible, serve landlords with notices for rent reviews.

Reductions in rents are currently being negotiated according to George Dunn of the Tenant Farmers Association.

"Rent is one of the biggest costs tenants face and they need to look at containing and reducing it. Consider whether your rent is affordable compared with farm profitability.

"Dont be frightened to give you landlord notice for a review. Dont wait, do it now," he says.

Mr Dunn urges landlords not to see this as a sign of aggression, but to consider it a reasonable response of a tenant facing difficult times.

Rent reductions for traditional tenants, Farm Business Tenancy agreements and for grass keep are occurring, but fewer than Mr Dunn would like to see. "Landlords are reticent to offer reductions, even some of the more reasonable ones." But there have been few increases, he adds.

When farming on a traditional tenancy, tenant or landlord can call for a rent review every three years, following a formal procedure. But notice must be served 12 to 24 months before the proposed review date. A tenant who serves notice today, therefore, has to propose a review date in 12 months time.

There is the possibility that incomes may increase in that time and the landlord may actually be able to increase rent. However, this is designed to protect both landlord and tenant from short-term changes in incomes, adds Mr Dunn.

Rules which apply to a Farm Business Tenancy rent review procedure may differ, he says. &#42