Farm businesses are using an increasing proportion of the loans available to them compared to a year ago, although borrowing only increased by 1% over the year until the end of September.
The latest figures from the Bank of England (BoE) show that UK agricultural and forestry companies had borrowed £ 19.6 billion from banks as of September 30.
Although this is a record, the amounts have been on an upward trend for many decades.
However, farms use almost 86% of the credit facilities available to them, a much higher proportion than has traditionally been the case in recent years. For example, at the end of 2017, they were using 72% of their facilities, as a year earlier. By September 2019, the proportion had risen to 76.6%.
The jump in the proportion used this year is largely due to a £ 2.4bn drop in facilities available for farming, rather than a large increase in the amount actually used.
While agricultural consultants do not see a widespread hardening of lender attitudes towards farm proposals, there is anecdotal evidence of more difficult conditions as risk in agriculture increases with the UK’s exit from the EU.
Many farm businesses have taken advantage of the government-backed Bounce Back loan program, introduced to help them overcome the impact of Covid-19. Fewer have opted for the coronavirus business interruption loan program, which has a more demanding application process. Amounts borrowed through these two programs are included in the BoE’s total £ 19.6 billion figure.
Agricultural Mortgage Corporation loans grew 7% last year, with a growing share going to refinancing, and those loans would not be included in the BoE’s figures.
Credit balances increase
Barclays National Farm Strategy Director Oliver McEntyre said it was important to consider credit balances in agriculture at the end of September to reach £ 9.3 billion, up 1.6 billion billion pounds from the previous year, also a record.
“The net debt position [total debt less total credit balances of UK farming] in September 2020 [£10.345bn] compared to September 2019 [£11.766bn] shows debt reduction of £ 1.421 billion – down 12%, ”he said.
“It can be due to many factors. However, we have seen a period of high firm prices for most sectors, and while there have been strong reactions to the supply issues related to Covid-19, these have thankfully been short-lived in the long run. ‘together. Likewise, there have been difficult weather conditions to work with, but farmers are resilient and they have done remarkably well. “
Barclays made no changes to its agriculture lending guidelines, he said.
On the farm, advisers have issued new cash flow warnings for arable businesses, especially for next spring.
“We are already seeing some tightening in cash positions, but do not expect any significant difficulties until spring,” said Hamish Bichan, director of the advisory board Active Business Partnerships.
“It will be quite a problem in April, May, June and July,” he said. “Even for our most successful clients, we have advised them to keep a realistic picture two years in advance so that if we need to make changes, we can do it early. “
This forecast also had to take into account the reductions in the first stage BPS, Bichan said. “It would be a brave business moving forward without a realistic picture and an indication of both profits and likely cash flow generation.”
Banks would continue to support businesses they trusted, but where it was lacking, things would get more difficult, he said. The supply trade could also start to tighten its credit to farmers.
Banking and financial checklist
- Review all finances regularly, even if you no longer have an annual meeting with your bank manager.
- Does your overdraft fluctuate? Do you clean it almost at certain times of the year or is there a core that is never cleaned? If so, maybe that core should be the subject of a structured loan so that you don’t pay the annual facility fee and some repayment discipline is introduced.
- Study the loan documents carefully. Is the loan really fixed at 30 years, or is there a five-year review? Also check for prepayment charges, fixed or variable rates.
- Understand your accounts and be able to explain them – credit teams will want to understand the reasons for discrepancies.
- Think carefully about hire-purchase, one of the most common reasons for rejection of new loan applications because high principal repayments can quickly take all the money out of the business. There is no point in taking 0% financing on a tractor if your overdraft increases due to principal repayments.
- Understand the cash generated by trading as well as the profits. Changes in stock valuations and depreciation can soon skew earnings.
- Look at the capital section of your accounts as closely as when trading. If net worth does not increase every year, especially education liabilities.
- Plan the tax bill in January – don’t assume your BPS check will be there to cover it.
Source: Andrew Jenkinson, Partner, Robinson & Hall