Business Clinic: Borrowing to buy land – what to consider

Whether you have a legal, tax, insurance, management or land issue, Farmers Weekly’s Business Clinic experts can help. Here, Charles Skelton of Savills sets out what to consider when increasing borrowing to buy land

Q I am thinking of borrowing to buy some neighbouring land. I want to fully understand the impact on my business. What should I consider?

A See your business in the same way your bank manager would. How at risk is your present financial situation and what might it look like if you make the purchase?

Acquisition of major assets such as land and property that involve bank borrowing may put pressure on the balance sheet in terms of gearing ratios.

These compare medium and long-term liabilities with your net worth and are typically presented as a percentage gearing ratios will be one of several considerations by a bank before lending.

See also: Use share farming to meet greening requirements

The target ratio would be under 50%, however, it is accepted this figure will be distorted by the purchase of a significant asset with 100% borrowing but the bank will need to understand how the ratio will be brought back into a “normal” range.

Remember also net worth calculations rely on asset values which may not be current or accurate.

Cashflow perspective

Banks will also want to see a strong business case for the potential purchase and your plans make sense from a cashflow perspective.

It is important to include all expenditure during your proposed payback period, such as any other capital purchases. There is no point in replacing a bank loan with an increased unforeseen overdraft facility and no immediate plan to repay.

Appraise how your business would look without Rural Payment Agency income. Prepare a sound plan for repayments and understand the full demands of cash in the business (including private drawings and tax).

Identify and declare private drawings and income tax. Understand what depreciation means to the profit and loss account and how this translates to cashflow forecasting.

It is essential all cash income and expenditure is considered when appraising a large long-term capital purchase. Repayments due on asset finance and long-term bank loans and mortgages are calculated over a period of time.

Meanwhile your profit and loss account is affected by plant and machinery depreciation the moment the item arrives on the farm.

Depreciation is not a cash item but it is important to understand how your accountants calculates it.

Be realistic and include sensitivity analysis in your future gross margin calculations; for example, what would a 30% increase or decrease in the price of your sales or cost of your inputs do to your cashflow?

Consider also the ownership of the land – whose name will be on the title deeds? In general, it is best to avoid joint ownership but consider succession planning opportunities down the line.

Take advice to ensure you get things right first time and avoid expensive remedial action.

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