Advice for farmers on switching lenders in a competitive market

Lending to farming is a competitive market, with some banks active in seeking new farm business.

While farmers have historically switched banks very infrequently, and often not at all, finance costs should be reviewed regularly, says consultant Sophie Cahill of the Farm Consultancy Group’s registered credit broker, Midwest Consulting.

“Don’t be scared to change lenders or to do it on a regular basis,” she says. “Borrowing should be reviewed just like any other input.”

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For farmers looking to refinance by moving banks, one lender is waiving the arrangement fee, which is typically 1% of the facility being arranged.

“When taking out new finance, whether it be completely new money or refinancing existing debt, the arrangement fees charged can often make the process appear restrictive, or even unaffordable,” says Sophie.

“However, this needn’t be the case. These fees are now open to an element of negotiation – there are deals to be had. Even if you’re not planning to move, it’s worth exploring what other lenders are offering.

“The main thing is to be prepared with the information the bank might want. This doesn’t necessarily mean forward budgets – sound businesses will find good sets of accounts acceptable to lenders.

“That is, unless you are planning something new in the business, in which case budgets will be needed.”

However, tenants have to work harder on borrowing proposals because they cannot offer the security of owner-occupiers.

When looking to switch lenders, most banks prefer to take on both the farm’s overdraft and loan borrowing, but in some cases they will offer to fund just the overdraft if they think there is a longer-term prospect of getting the loan business too, says Sophie.

Covenants

A covenant is a condition attached to lending that requires a certain performance level from the customer business in order to keep the facility. These are being used less now than in the recent past, says Sophie.

Increased competition

At finance broker and mortgage adviser ­Ashbridge Partners, managing director Mark Ashbridge says that in the past two years the farm lending market has been more competitive than at any time since 2008.

“The main banks are making more profit as a result of the higher base rate,” he says.

“When base rates were close to zero, there was less scope for them to make a good margin on deposits, so now that they are more profitable, they are able to roll some of that into the market if they want to increase their market share.

“The banks are more accommodating and more pragmatic. Also, there has been quite a move to interest-only lending to farming, rather than the traditional capital and interest.”

With up to 15 lenders in the market, he suggests using a broker to find good deals.

“More and more business is arranged through intermediaries,” he says. “The banks pay us significant commission to bring and present business to them because they have rationalised their staff on the front line.”

The market and appetite for lending to farming is continually changing, with lenders coming in and out of the market at short notice.

“Sometimes they want more, sometimes they shut the door,” says Mark, pointing out that a broker will know who is in the market and what deals have been done.

He puts arrangement fees generally at 0.5% to 1%, with the lower end of this usually for larger sums of several million pounds.

Lower arrangement fees can be found, sometimes in a nominal sum with an additional charge loaded onto the margin over base, he says.  

With the expectation of lower base rates, little fixed-rate business is being done and there is little or no premium to fix over the cost of variable-rate borrowing.