About half of all UK farms use some form of diversified activity in their farming business and these bring an average of £10,400 extra revenue per farm. Diversification comes with its own challenges and can require investment – but can also boost profits in the long-term or even be the different between survival an obsolescence for some farmers.

Mark Suthern, National Head of Agriculture at Barclays gives some top tips on funding an agriculture diversification project.

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What’s driving farm borrowing at present? Is Diversification a key reason farmers are approaching you?

We regularly see requests from clients that want finance for diversification projects. Their situations vary. In some cases, they are looking to add an extra business to help increase revenues or make their businesses more resilient. In other cases, it can be part of family business planning, where the family realises that the farm may not support all of the future generation, so they want to add additional businesses to make inheritance work more fairly.

We are seeing an increasing number of clients looking to make off-farm investments – ones outside their core farming business. This can help avoid their wealth being too concentrated in one business area. Examples include commercial property, office space and tourism projects. Often these off-farm investments are ones where the client has a low emotional attachment, and may aim to sell them at a later date.

Low interest rates and strong balance sheets can help facilitate such investments. At Barclays, we have developed and launched our Rural Project Loan for this reason. It effectively allows a farm or estate to leverage its asset base and take funding, interest only until the diversification is up and running and can start to meet capital repayments.

However, it may be helpful to set this in context. Overall demand for debt within UK agriculture is actually relatively steady at present – up around 1.6% year on year to the end of June 2018. This probably reflects relatively strong agricultural commodity markets for the last two years, reducing the need for borrowing, and caution as Brexit approaches. We think some farm owners may be postponing investment decisions.

Can you give a couple of examples of projects (anonymous, of course) you have helped fund which could be classed as diversification or at least a divergence from the farm’s traditional income stream?

We literally see and fund every type of on-farm diversification you can imagine – from sites for posh camping, or “glamping”, to industrial units, and from farm shops to woodland burial sites, and from equine businesses to crop processing

If the business plan shows it will be sustainable and viable, the farmer has the right skills to operate the business, or will hire them in, and the figures stack up, we will look to support clients in developing their business.

We also frequently see farms diversifying within agriculture. Perhaps the most common type is investment in poultry units, either for eggs or broiler birds. This can provide an additional revenue stream for a farming business, and one that is less affected by the weather.

As a lender, what are you looking for in an application?

For a diversification project, we need to see a sound and reasonable business plan, based on solid assumptions backed up by some market research. Location is key for many projects, and in those cases farmers should be looking to fill the gaps in demand in their local area.

Clearly if someone in the family has a particular skill or interest, they should look to capitalise on that in the more niche areas, but most projects need the right location to further enable success, especially if you are expecting your customer base to come to you.

The business plan should have an outline of the project and include financial projections which run for as long as it takes for the project to become cash positive, which should usually be around two to three years.

There should also be a marketing plan, based on sound research and assumptions.  Very often this can be commissioned from a professional – someone that can give a great insight into different ways of marketing and reaching your target market.

One additional point is that when reviewing a diversification project, we always like to see a “plan B”. What will the client do if the project does not perform as expected? Will it be sold, or wound down, and how would this work?

What are the absolute ‘must-haves’ farmers should include in an application for lending?

First, we need to see an outline of the project. There must be a clear marketing plan and analysis of the market size. If you are diversifying within agriculture, a contract of supply is vital. There must also be clear and accurate itemised costs that will be involved.

We also like to see what the key performance indicators (KPIs) will be: what level of sales do you need to hit break-even and how do they measure up against norms in the industry. Depending on the project, these KPIs can include things such as average customer spend, visitor numbers and occupancy rates.

Finally, we want to see evidence of the skills and experience needed to run and manage the project without impacting the existing business, or how the owner plans to hire these in.

Conversely, where might an application fall down or be refused?

Business is business as the phrase goes. It’s important that business owners lead with their head not just their heart, and grasp the figures. Something that feels like a great idea, might not actually stack up financially – so business plans that are over-exaggerated or over ambitious in the first couple of years might well make a project look great, but will soon run into problems if the KPIs cannot be delivered.

It is always great to lend money to a client who is passionate and has ambition, but if they forget the detail and write a business plan that is unrealistic or undeliverable, or lacks depth, this is likely to come out in the analysis we do.

We hear a lot about affordability from the banks today - is that your number one criteria?

We are focused on having long-term, productive relationships with clients, so while the ability to service debt is a key factor, it is not the only one. We also emphasise the need for a sound and realistic business plan, and the ability of the people involved to deliver that plan. What skill sets do they have, what training might they be taking or what skills are they going to hire in? Understanding people and their ambitions is at the heart of our approach.

Can you advise on the process you recommend farmers should take if they’re thinking about a diversification project that will require lending? i.e. in what order should they do things and at what point should they engage you?

We would suggest engaging with us from an early stage and taking some strong independent advice – we might even be able to put them in touch with some specialists who can help develop the project. We have a huge client base and a huge network of agricultural managers covering the whole country, so the chances are we will have experience of similar projects, and we can draw on those experiences to help farmers developing diversification ideas.

Do you have any top tips for securing the right finance package for their diversification project?

Be realistic with your business plan and figures, conduct market research and combine that with a good marketing plan.

Do you have any advice for them or examples of how you help the younger generation who perhaps don’t have the assets available to secure funding against?

Sometimes it is best to start small and build up a track record. This can be better not only for the bank but perhaps for the family, too.

It’s worth being aware of other financial products like confidential invoice discounting, allowing a business to be paid right away after issuing an invoice. This can help push cash into a business, allowing it to grow faster than with just a traditional overdraft.

It is also important to have realistic expectations about how the business can grow – remember that most apparent overnight successes are in fact usually years in the making. What a farm provides – which many aspiring entrepreneurs don’t have – is a base, space and all those bits and pieces of equipment the next generation can utilise.