The word ‘loan’ is a word that many farmers dread. I have met many small and large farmers over the years and nine times out of ten they’d prefer to do the work out of cashflow.
There is a lot to be said for doing work out of cashflow. There is the interest saving and the time saving without having to apply for the loan; however there are pitfalls.
Farming is hugely volatile and is changing all the time. Beef, sheep and dairy prices are constantly changing and it can be hard to budget for the next 12 months without even considering a new build that is to come out of cashflow.
Sometimes the job at hand is too large and will require a loan from a banking entity. For circumstances like this, it is important to know the necessary paperwork to apply for a loan and get to the drawdown stage as fast as possible.
What is required to apply for a loan?
For farmers registered as a sole trader, partnership, or limited company, this is where your farm income and the unpredictability of farming comes in to play.
A farming entity requires:
Two years’ worth of the most recently audited or trading accounts, certified by your accountant.
Most recent audited or trading accounts certified by your accountant.
Your two most recent revenue acknowledged Form 11s if applicable.Six months’ worth of recent business current accounts.Six months’ worth of recent business borrowing statements.Confirmation that your tax is up to date from your accountant.If renting, a copy of the lease
agreement.Breakdown of the costs included in the building project (including price quotes, if possible).If the loan is secured, a land parcel that you propose to use as security.ICBF reports for the past
three years.The bank will sometimes require five-year projected cashflows to see your vision for the farm in
the future.BREAD IT DOWN
Clearly, there is a lot of paperwork involved in applying for a loan, however, it is not as daunting as it may seem. For the above paperwork, if you break down the location of each piece of information, then you will know who to contact and will have it as soon as possible.
For example, audited accounts, Form 11s and confirmation that your tax is up to date all are accessible from your accountant. Six-month statements for current and loan accounts, a breakdown of costs and the ICBF reports are all pieces of information you can access yourself and don’t need a professional advisor for these. There are 10 bullet points in the above breakdown and you can access seven of the ten between yourself and your accountant.
Who do I contact about the loan and how much can I borrow?
Your best points of contact for a loan for your farm are your accountant and your bank relationship manager. Your accountant will know from your accounts, more often than not, whether you can afford to go ahead with the project.
Most farmers tend to be seen as asset rich and cash poor seen as asset rich and cash poor and if you are making a profit yearly of €80,000 but still have a bank balance of €4,000, it is hard to see how you could afford to take on extra loan repayments. Sometimes the answer is right in front of your eyes.
However, let’s take for example a business with a profit of €80,000 each year.
With average drawings over the past three years of €30,000 to cover day-to-day living expenses and with €10,000 worth of loan repayments, this reduces your free cashflow to €40,000.
The lender will stress test the income to ensure if something happens or your personal farming enterprise takes a turn for the worse you can still repay your loan. In this example after stress testing, your free cash flow could further be reduced to approximately €25,000, which would reduce your repayment capacity further. The €25,000 is an approximate on the extra repayment capacity of your farm.
A secured loan on a building can be given up to a maximum term of 15 years with a secured loan on land allowed to be given over 20 years. Let’s take the building loan for example and use our repayment capacity yearly of €25,000. It would allow us to borrow €270,000 over 15 years at an interest rate of 4.5%. In the 15 years you would repay a total of €371,786, for a total interest of €101,786.
Other considerations
It is important also to calculate the VAT and grant (if applicable) element of a build. The VAT and grant element can be drawn down using a bridging loan, which can be repaid on receipt of the grant and VAT back from the department and revenue. This will leave you needing a long-term loan only for what’s necessary and could allow you to borrow more or less depending on the amount your VAT and grants make-up of the overall build.
Err on the side of caution
Loans are something that should not be taken lightly. As can be seen above, there can be substantial interest payments on a loan over 15 years and this money could possibly be used elsewhere.
It is important to ask yourself before taking on a project; is it necessary to do it now? Do I feel I can take on those payments regardless of it works on paper or not? Could it be pushed out a few years or done in stages to allow the farm to build some cash reserves and reduce the loan that is required to complete the project?
It is also important to take into account personal circumstances. Will your drawings be rising, do you have events coming up over the next few years?
Farmers often forget to look after themselves and will always put the animals first. Sometimes it may be important to take a step back, look at your own circumstances and put yourself first for once.
Read more
Family finance: Managing the farm cashflow
Finance: Tax reliefs when transferring land to family
The word ‘loan’ is a word that many farmers dread. I have met many small and large farmers over the years and nine times out of ten they’d prefer to do the work out of cashflow.
There is a lot to be said for doing work out of cashflow. There is the interest saving and the time saving without having to apply for the loan; however there are pitfalls.
Farming is hugely volatile and is changing all the time. Beef, sheep and dairy prices are constantly changing and it can be hard to budget for the next 12 months without even considering a new build that is to come out of cashflow.
Sometimes the job at hand is too large and will require a loan from a banking entity. For circumstances like this, it is important to know the necessary paperwork to apply for a loan and get to the drawdown stage as fast as possible.
What is required to apply for a loan?
For farmers registered as a sole trader, partnership, or limited company, this is where your farm income and the unpredictability of farming comes in to play.
A farming entity requires:
Two years’ worth of the most recently audited or trading accounts, certified by your accountant.
Most recent audited or trading accounts certified by your accountant.
Your two most recent revenue acknowledged Form 11s if applicable.Six months’ worth of recent business current accounts.Six months’ worth of recent business borrowing statements.Confirmation that your tax is up to date from your accountant.If renting, a copy of the lease
agreement.Breakdown of the costs included in the building project (including price quotes, if possible).If the loan is secured, a land parcel that you propose to use as security.ICBF reports for the past
three years.The bank will sometimes require five-year projected cashflows to see your vision for the farm in
the future.BREAD IT DOWN
Clearly, there is a lot of paperwork involved in applying for a loan, however, it is not as daunting as it may seem. For the above paperwork, if you break down the location of each piece of information, then you will know who to contact and will have it as soon as possible.
For example, audited accounts, Form 11s and confirmation that your tax is up to date all are accessible from your accountant. Six-month statements for current and loan accounts, a breakdown of costs and the ICBF reports are all pieces of information you can access yourself and don’t need a professional advisor for these. There are 10 bullet points in the above breakdown and you can access seven of the ten between yourself and your accountant.
Who do I contact about the loan and how much can I borrow?
Your best points of contact for a loan for your farm are your accountant and your bank relationship manager. Your accountant will know from your accounts, more often than not, whether you can afford to go ahead with the project.
Most farmers tend to be seen as asset rich and cash poor seen as asset rich and cash poor and if you are making a profit yearly of €80,000 but still have a bank balance of €4,000, it is hard to see how you could afford to take on extra loan repayments. Sometimes the answer is right in front of your eyes.
However, let’s take for example a business with a profit of €80,000 each year.
With average drawings over the past three years of €30,000 to cover day-to-day living expenses and with €10,000 worth of loan repayments, this reduces your free cashflow to €40,000.
The lender will stress test the income to ensure if something happens or your personal farming enterprise takes a turn for the worse you can still repay your loan. In this example after stress testing, your free cash flow could further be reduced to approximately €25,000, which would reduce your repayment capacity further. The €25,000 is an approximate on the extra repayment capacity of your farm.
A secured loan on a building can be given up to a maximum term of 15 years with a secured loan on land allowed to be given over 20 years. Let’s take the building loan for example and use our repayment capacity yearly of €25,000. It would allow us to borrow €270,000 over 15 years at an interest rate of 4.5%. In the 15 years you would repay a total of €371,786, for a total interest of €101,786.
Other considerations
It is important also to calculate the VAT and grant (if applicable) element of a build. The VAT and grant element can be drawn down using a bridging loan, which can be repaid on receipt of the grant and VAT back from the department and revenue. This will leave you needing a long-term loan only for what’s necessary and could allow you to borrow more or less depending on the amount your VAT and grants make-up of the overall build.
Err on the side of caution
Loans are something that should not be taken lightly. As can be seen above, there can be substantial interest payments on a loan over 15 years and this money could possibly be used elsewhere.
It is important to ask yourself before taking on a project; is it necessary to do it now? Do I feel I can take on those payments regardless of it works on paper or not? Could it be pushed out a few years or done in stages to allow the farm to build some cash reserves and reduce the loan that is required to complete the project?
It is also important to take into account personal circumstances. Will your drawings be rising, do you have events coming up over the next few years?
Farmers often forget to look after themselves and will always put the animals first. Sometimes it may be important to take a step back, look at your own circumstances and put yourself first for once.
Read more
Family finance: Managing the farm cashflow
Finance: Tax reliefs when transferring land to family
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