Banking For New Entrants to milk Production June/July 2012

New Entrant Background Capital is difficult to acquire Banking industry issues EU financial issues Quota is a a challenge Milk price is now cyclical Single farm payment is under review So Difficult Environment!!

Types of Finance Bank Loans 5-6% Overdraft 9-13% Hire Purchase/leasing 6-10% Credit Union 8-11% Merchant Credit 12-14% Contractor 5%?????? (sometimes none) Credit Card 18%+

What the Bank Needs!!! Repayment Capacity Security Margin

Costs of funds (6 month Euribor) Euribor % Euribor % Euribor % Euribor 2012 Declining currently 6 month Euribor now 0.95%

Costs of Funds for bank Euribor 6 month0.95% Irish Bank cost1.26% Bank Margin (3-4%)3.5% Total5.71% Do cash 7.5% at least

Security Now requires a legal charge Split folios if possible- allows flexibility Present and future borrowings need to be considered Don’t put all eggs in one basket LTV can effect rate May ask for more than adequate security

You Look for Longest term Possible (cash flow will be the challenge) Rate referenced to Euribor Transaction/transfer costs – what are they Security- as little as possible Follow the Top Man Relationship/farmer friendly Try to get banking person to visit your farm No point in getting good rate if you cant get the money!!!

Independent advice Study loan offers carefully Read the fine print Ask if you are not sure Watch out for early payment penalties Review period Review security Don’t sign in a hurry!!

Your Image Professional, Best Farmer, Growth potential, ambition, etc. Complete knowledge of your profitable business No ifs, buts or don’t knows Profit monitor Business plan 4 yr accounts Tidy office & prompt replies to bank Demonstrate you can live within your means

Fall Back Position Multiple banking if possible Cash is king: so must have a reserve Robust projections on milk price, inputs interest rates etc. If it goes wrong, what is exit strategy? Understand taxation and welfare positions

Overdraft Typically 4-5% above loan rate On a well run €25k overdraft facility costs about €1k.But badly run €3k+ Utilise the full amount of overdraft for short time during the year Adhere strictly to the 30 day rule.

Leasing Asset will usually satisfy security Interest rate is fixed for term of loan Early termination costly Merchant/supplier based Real cost is reduction in bargaining power Can make use of it strategically