What has changed in recent years?
Historically, agricultural lenders were more concerned about security on loans – something most owner-occupiers have plenty of.
Now there are a lot more checks about the affordability of a loan – can farmers afford the interest? And that’s where difficulties tend to arise, because in the past, farmers have been focused on reducing tax bills, so decreasing profitability. Now, if you don’t make much profit, you’re unlikely to pass the affordability checks.
Questions to ask
- Is this a loan, HP or a lease facility?
- Is it secured or unsecured?
- What amount is being offered, over what period?
- When is each payment due?
- What rate of interest is being charged – flat rate and true annual cost?
- The total cost of the facility?
- Is there any end-of-deal payment, any start-up payment or additional fees or charges?
- Can I have written confirmation of all of the above, including a breakdown of how interest and charges are calculated?
Some lenders are also running stress tests to evaluate the ability of a client to service the loan if interest rates rise. Typical lending rates at the moment are 3%, but some lenders are looking at whether clients can afford it if rates rise to 7%. If you’re not making a profit, that’s going to be an issue, regardless of your capital assets.
Who is lending now?
The big banks are still lending – some of them clearly see agribusiness as a strategic priority and are boosting the strength of their offering.
An experienced bank manager with a good knowledge of the sector can add real value to a business.
Bank managers, however, do not have the same authority as they used to. They may provide an ongoing point of contact, with annual meetings and so on, but the vast majority of loans need a second signature through the bank’s credit team.
The AMC has always had a good understanding of agriculture, and maintained more consistent lending policies than some of the banks.
With an AMC loan you are left to get on with it, which is fine if everything is running well, but requires more active management by borrowers who run into difficulties.
Other sources of finance known as secondary lenders are raising their profile and may pay partners to recommend them.
These tend not to have a high street presence and in some cases are newer businesses than traditional lenders. As with any new supplier or buyer, check the reputation, track record and viability of who you are dealing with.
If anyone recommends any finance provider, ask if they are being rewarded for that recommendation and by how much.
How can I check the standing of a lender?
Banks should all be members of the British Bankers Association, while other lenders should be accredited with the Finance and Leasing Association, which has a website including a code of conduct and searchable database.
You can also search for the firm’s accounts online to find out how long they have been trading and their net worth – again, it is free and easy to do. Typically, the longer a firm has been trading the better, although this is no guarantee, and if its shares are publicly quoted that is often a good sign.
Whenever considering a firm you haven’t dealt with before, ask for references and it is worth checking online for any other farmer comment about their experience.
But beware online review sites, as you never know who has really put those reviews up – they are open to manipulation.
If you deal with a financial broker or adviser, they may be able to conduct background checks on the directors, or may already have experience with them.
What if a mainstream firm won’t lend to me?
If you can’t borrow money from primary lenders, you really need to question why they won’t lend to you – should you really be borrowing?
If a supplier recommends you use a particular lender, ask if they have a licence from the Financial Conduct Authority to make such recommendations, and understand if they are on some sort of commission. That in itself isn’t a problem, but keep your eyes open.
Sometimes people need secured lending in a hurry – for example in the case of divorce or sudden financial difficulty. There are lenders who will provide this kind of short-term funding and in some cases it is the right deal at the right time, but you need to understand exactly what is being offered.
Get written terms and conditions and if there is anything you don’t understand, ask for a clear explanation and get a professional to check the terms for you.
Too often people in need of finance are in too much of a rush to accept what is being offered, only to realise later that it is not quite what they thought they were signing up to.
Fees can be 3% up front, plus 3% a month, and 3% on repayment and some firms charge very high rates for valuations and solicitors.
If a quick turnaround is promised, you need to be sure the right checks and measures are in place – both sides need to do due diligence checks and that can’t really be done overnight.
Be very clear on your reasons for short-term borrowing and have a plan on how you are going to repay it quickly – it definitely isn’t a long-term solution.
If you are having financial problems and feel that short-term borrowing is the only way out, it is worth speaking to the Farming Community Network, as they will be able to provide help and financial advice.
How can I be sure I’m getting the best deal?
It is always worth getting a couple of quotes to compare, but be sure you are comparing like with like.
Is the loan unsecured or secured? Is it hire purchase or leasing? The two are very commonly confused. With hire purchase, you make the payments and at the end you own the kit. VAT is payable in full up front and reclaimed when payments begin.
With leasing, it is just a rental agreement and you will never own the machinery, VAT is charged on the lease payments and reclaimed under the usual procedures.
Finance companies sometimes present the tax relief available on machinery as a reduction in interest rate, but the two have nothing to do with each other. Again, ask for a breakdown of the figures and run them past your accountant.
This should in any case form part of your due diligence, and is vital if you are relying on tax relief to justify your decision.
Another common mistake is comparing a flat interest rate with the true annual cost or APR. The flat rate is calculated on the opening balance of the loan and applied across the whole amount for the whole period, while the APR is calculated on the reducing balance.
But don’t get too hooked on the interest rate – focus on the value of what you are getting. Always look at the long-term implications of any agreement, and who owns the assets at the end.
Never sign a blank finance document and always take your time to read the small print; don’t be pressured into signing quickly, particularly if the lender is new to you. And always remember – if something seems too good to be true, it probably is.
There is a saying that “nothing in life is too expensive, it just might be that you can’t afford it”.
Hire purchase v lease
- VAT is payable on the cost of the equipment at the time of purchase
- Interest charge is tax deductible
- Capital allowances/depreciation can be claimed
- At the end of the agreement ownership is transferred for a small fee – typically £50-100
- VAT is charged on each monthly/quarterly instalment
- Leasing payments can be offset against income for tax purposes
- Capital allowances cannot be claimed
- Ownership does not transfer at the end of the rental period – it may be purchased via a third party with the cost ranging from 5-50% of the original value of the asset