28 December 2001


THE farm finance market is as competitive as it has

ever been as the number of full-time working farmers

and decision-makers continues to fall. Suzie Horne

finds out how to make the most of it

NEW investment in 2000 was less than half the level of just five years earlier, but lenders are chasing targets to increase business.

It pays to heed the basic rules governing borrowing to finance capital expenditure, says John Colley, senior agriculture manager at HSBC.

These include matching the loan to the expected life of the asset (or a shorter period), making sure the business will be able to meet repayments without putting undue pressure on cash flow, and paying off loans as quickly as possible because the shorter the period, the less the total cost.

"Its important to maintain some flexibility, particularly on longer term loans," says Mr Colley. Watch out for early repayment penalties, also known as settlement fees, which are likely to be a feature of fixed-term deals.

Everything is negotiable, including the margin over base and the costs of arrangement. After negotiations, a facility letter or offer letter should set out the terms and conditions of the loan. If anything is unclear at this stage, borrowers should seek clarification, he says.

If a project is going to take several months to complete, the borrowing can be arranged to avoid having to pay for the cost of the full facility, much of which may not be required for some months.

"Try to come up with the most appropriate arrangement for your situation," says Mr Colley. "In some cases we will put the first few months of a project onto overdraft and then transfer to a loan when the bulk of the requirement for the funds kicks in.

"With base rate at 4% and the premium to fix at around 1.5 points over base for 10-year money, that gives a cost of funds of 5.5%, which is lower than base rates were even a year ago." On top of this there will be a lenders margin.

Despite relatively low fixed rates, not many farmers are taking this option. Nevertheless, people are keeping an eye on this market. "Some fixed rate loans are being used to pin down costs, for example on purchase of milk quota, but I would definitely not advise people to go for longer than a 10-year fix."

Farmers need to address all types of risk in their businesses – for some it will be commodity prices, for others interest rates and for some it may be staff, says Mr Colley.

"If you are borrowing large amounts you need to think about how to protect against interest rate risks. Fixing is one way. Base rate caps are another."

This caps the future base rate at whatever level the customer decides he is willing to bear. With base rate now at 4%, a borrower may decide that he can still cope if the base rate rises to 6%.

If base rates subsequently rise above that level, then the borrower is compensated with a payment of the difference between the capped rate and the new higher base rate. This compensation is paid across the total amount capped, even if it has not all been drawn down.

However, he also gets the benefit of any reduction in base rate if it falls below the level at which he takes on the loan. This protection costs a premium based on the amount of money capped, the rate at which it is capped and the length of the loan.

Theres plenty to offer in the loan market at present, but take care – some schemes may be more suitable than others.

Be prepared to negotiate when seeking a loan, says HSBCs John Colley. Margin over base and arrangement costs are all moveable.

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