With farmers facing an uncertain future for a variety of reasons, Tim Shuldham of Fisher German is urging them to take the time to assess what type of loan is best for them before making any hasty decisions.

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Against the backdrop of anxiety about the future profitability of farming, there is every reason to review the funding of farming businesses, whilst the present conditions prevail in terms of profitability, interest rates, and lenders’ appetite.

If there is a difficult time ahead to endure, knowing that the funding of the business is in place, secure and affordable is a considerable comfort and protection.

Overdrafts are the funding source most vulnerable to review and to changes in lender appetite, which can mean pressure is put on funding at the time that it is most needed.

Moving hard-core borrowing from overdraft to secured lending reduces the risk of the overdraft becoming a concern to the lender and gives a structured route to the reduction of overall debt if done on a repayment basis.

An overdraft facility that meets the working capital needs of the business, but which is not used for part of the year, is hard to criticise from a lender’s perspective. But an under-provision of funds leading to a request to increase an overdraft is often the prompt for a lender to review their overall position.

Term loans are not always what they seem, and borrowers need to understand exactly how long their loans are for. To meet the regulator’s banking capital requirements some lenders have reduced the length of loans they offer with ten years or even five being the limit for some.

Repayment of the loan may be calculated as if it is for a longer period, such as 20 years, to make the borrowing more affordable. 

Some borrowers can believe they have an arrangement for 20 years when in fact, the loan is subject to review. The loan will end after the ten or five years and a new loan will have to be agreed.

The annual cost of debt when times are tight is a crucial measure and can be more important than the interest rate itself.

In times of plenty, borrowing short term and taking the stress of heavy annual repayments can be prudent. In more straitened times it can be better to borrow longer to ensure the annual cost of interest and repayment is well within the capacity of the business.

Stress-testing financial performance to understand what margin of cover there is on the repayments will help determine the amount and term of loan that can be supported.

In less uncertain times the purpose of the loan can determine the length of term.  For investment in items with a short life such as machinery, loans are generally short term whereas longer life investments such as buildings might be longer term and land purchase even longer.

In times of uncertainty it is helpful to maintain flexibility, and there is a trade-off in borrowing between security and flexibility.

Taking a fixed rate gives certainty to the annual cost, but if for any reason the unforeseen arises and the debt must be reduced or repaid then penalties can be faced.

There are pros and cons in taking a mixed bag of arrangements such as having a proportion of debt fixed and possibly for different periods and maintaining a proportion on a variable rate. This requires more investment of time and thought at the outset but can spread the risks well.

Purchasing funds for a business should be treated as any other purchase with the different models thoroughly investigated. Suppliers should be challenged for the best deal, all the terms, not just the price, should be thoroughly understood and annual reviews should be carried out to ensure the product is still delivering the best results to the business.