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Outline Set business objectives What do you want from your farm business Most farmers will want to develop the business To develop the business you need to reinvest Business planning Cashflow budget How does a farmer access finance Sources of funding Types of loan, (Overdraft, Term Loan, HP) Interest rates, best deal What does the bank require Business plan showing ability to repay Evidence of past performance (benchmarking) Credit rating 2

Goals Recap - What do you want out of the business? -A decent standard of living -Education for children -Top-class herd, flock, crop -Provision for retirement -A healthy business to pass on to next generation - Good income with surplus to reinvest and grow - May need to borrow to get there Long Term 3

 Benchmarking shows where we are now  Need to make decision – how to meet objectives  Decision making tools ◦ Partial Budgets ◦ Full Business Plan / Investment Appraisal  Finance – When and What do we need? ◦ Cashflow Budget  Where do we access the funding? 4

 Used for less significant changes ◦ Small expansion ◦ Starting a new enterprise ◦ Purchasing equipment  Looks at whether or not the proposed change would be more profitable than the current situation.  Farmer can do this themselves 5

 Used for significant changes ◦ Large expansion e.g. Green field site ◦ Starting a large scale new enterprise ◦ High capital cost investment ◦ Access grant funding  Looks at whether or not the proposed change would be feasible and worthwhile  Best completed with help from professional 6

 What monies are required ◦ from the Business Plan  When monies are required ◦ from the Cashflow Budget  Where do we get them from?  How do we monitor our cashflow? 7

Farm Finance Group Exercise  What sources of finance are available to Farm Businesses? 8

Financing the business Farm sales (produce, capital) Subsidies ( SFP,CMS,FWGS,LFACA) VAT rebate Merchant Credit Personal loan to business Family loan Banks Credit unions Finance Houses Loan sharks / Pay Day Lenders 9

Merchant Credit Used to be interest free but increasingly merchants are adding interest if this credit runs over one month. Typically credit costs 2% per month which is the equivalent of an annual rate of 24%. If farmers pay Cash On Delivery they can sometimes secure discounts 10

 Quick  Interest free?  No paperwork?  Terms of agreement if business folds?  Can effectively become a subsidy if not taken back out! 11

 Quick  Interest free?  Terms and conditions?  Can be problematic, family differences 12

 Cooperative financial institution  Owned and controlled by its members  Promotes saving, providing credit at reasonable rates  Offer many of the same financial services as banks  Limited to smaller investments  Only open to members of the organisation 13

 Quick  Massive interest e.g. Wonga.com, Money Markets.com  Risky 14

 Specialise in Lease & HP  Large in number and extremely varied  Not all regulated by FSA 15

 Main high street banks providing a variety of finance options  Local Agricultural Managers ◦ Ulster Bank ◦ Danske Bank ◦ Bank of Ireland ◦ First Trust ◦ HSBC ◦ Barclays 16

Financing the business Overdrafts Term Loans Variable rate loans Fixed rate loans Capped rate loans Mortgages Hire Purchase & Leasing Credit cards 17

 Short term finance, used for working capital  Renewed annually, at a fee  Interest rates are variable, linked to the particular bank’s base rate  Usually higher interest rate than longer term loans although not necessarily more expensive  Adds flexibility, used when needed and paid off later  Can be asked to repay at short notice  Should swing into credit during the year  Effectively a current account with a borrowing limit 18

Fixed Interest Rate Loans Can be either: a)Fixed Rate - Fixed Term or b) Fixed Rate - Variable Term Term Loans Variable Interest Rate Loans Can be either: a)Variable Rate - Fixed Term or b) Variable Rate - Variable Term 19

 Allows the buyer to hire / lease the goods, often from a dealer  At the end of the contract, buyer either returns the goods or buys for a nominal fee  Buyer who has the use of the goods is not the legal owner during the term of the hire-purchase contract Tax implications  Hire Purchase – Capital Allowance available for buyer  Leasing – Capital Allowance not available (claimed by finance house) 20

Working Capital < 1 year short term repayment period E.g. Fertilisers, feedstuffs, fuel. Funded by Overdraft, Merchant Credit, Credit Card 21

Investment 1-5 years E.g. Machinery, Breeding Livestock, Large Repairs Funded by Medium Term Loan, HP, Leasing

Fixed Capital Farm Buildings Land purchase New dwelling house Major Investment 5-10 years+ Long term repayment period E.g. Land, Buildings, Drainage / Land improvement Funded by Mortgage, Long Term Loan

Straight Repayment  Repayments of principal/capital are in equal amounts.  Higher payments in early years but the overall amount of interest paid is lower  Not very common 24

Amortised  The repayments of principal/capital smaller in earlier years  Annual cost is similar throughout the term of the loan  Interest paid is higher as there is more capital outstanding for longer. 25

 Annual charge to write off £1000.  Repayment includes capital and interest assuming payment by one annual instalment. e.g Rate of interest % Year

 Annual Repayments for a £50,000 loan  Fixed at 6% interest over various time periods  The more years the loan is taken over the larger the total cost in interest. Repayment period (years) Annual repayment (£) (interest and capital) Total amount repayable (£) 511,85059, ,80068, ,15077, ,35087, ,90697,650

 Annual Percentage Rate (APR) is a way to compare the costs of a loan.  All Loans legally must declare APR  APR is calculated by including: ◦ interest ◦ capital ◦ all set up fees 28

 Assume you wish to borrow £100,000,  The lender tells you you’ve got a 7% interest rate over 30 years  You also have £1,000 of fees.  The APR in this case on a fixed rate mortgage works out to be 7.10% for 30 years 29

 Proposal ◦ What the loan is for ◦ The business plan  Ability to repay ◦ Capability and Character ◦ Capital  Other External Factors ◦ Risk, other income, succession etc. How do banks assess a farm business? 30

 Accounts  Benchmarking report  Gross margins  Bank statements  Credit history  SFP / off farm income  Security  Business plan Credit availability 31

Staying within loan structures keeps your bank manager happy!!! Puts you in a stronger position for negotiating another loan or overdraft. 32

Summary Set business objectives What do you want from your farm business Most farmers will want to develop the business To develop the business you need to reinvest Business planning Cashflow budget For most farmers this may mean borrowing How does a farmer access finance Source of funding Type of loan, (Overdraft, Term Loan, HP) Interest rates, best deal What does the bank require Business plan showing ability to repay Evidence of past performance (benchmarking) Credit rating 33

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