Borrowing from the bank

In the second part of the year many farmers examine what investment they will complete on farm in the months ahead. While smaller investments may be funded through cash flow, the majority of larger investments will require funding from a bank. Patrick Gowing Teagasc Dairy Specialist has helpful tips

There a number of things to consider and pieces of information to consider when applying to the bank for funding.

Here are some helpful tips:

Have your accounts up to date

The bank will use your previous performance from bank accounts to see your level of performance, current debt levels, tax position and drawings off farm. Previous performance of the business will give an indication of the farm performance post the investment.

Borrow over the right term

Don’t put your farm under cash stress by trying to pay for your loans too fast. Structure the debt appropriately to the asset you are investing in. As a rule of thumb stock will be funded over 5-7 years, soil fertility and grazing improvements over 7 years. Large capital builds like cubicles sheds etc over 15 years and land purchase over 20 years.

Complete a good capital budget

Have a good capital budget completed with at least a 15-20% contingency. Properly cost out your proposed investment. The bank prefer you look for enough funding upfront rather than running out of cash half way through the build. As we speak the cost of building materials are constantly changing so build in a contingency into your capital budget.

Farmer input

A bank will not 100% finance any project on farm. They normally lend to about 70% of the total investment. So the farmer has to have some input. This can be in the form of cash, stock or previous improvements on the farm funded through cash flow. Normally on a farm the level of input from the farmer is finite into the investment and this will determine the max amount you can borrow

Short term loan option

There are some short term loan option in all banks or credit unions that can be drawn down without any security. These loan options include Cultivate from participating credit unions, Milk flex from Finance Ireland and SBCI type funding as well. These type of shorter term loans are ideally suited for short term investments. For the larger longer term investments you will need to drawdown a secured loan. The banks based on land values from an approved land valuer will take a legal charge on your land. The bank will always look for more security than the value of the land. So if you borrow €100,000 on a secured loan they will seek land to the value of at least €130,000 (30% more). When security is required it can take a long time to get all the legal paperwork in place. So if you require a loan that involves security start the process well in advance of when you require the funding.

Cash is king

When a banks assess your proposal they will test it under a number of criteria. If we think about it the bank want to ensure that you can pay them back and pay all other expenses associated with your business. One metric they use is debt service cover. This is basically how many times you can pay the repayments on your proposed loan. So for example if your total repayments are 10,000 per year the bank will look for the business to have €4,000 in surplus cash after all other costs are paid ie 1.4 times the repayments. So as your repayments increase so does your requirement for surplus cash. If you shorten the term, this will increase repayments and also increase your requirement for surplus cash.

Prepare a business plan

Having a well prepared business plan is essential. It puts figures on your proposed investment and shows the impact it will have on your business going forward. See Developing a financial plan

You might also like to read Investment and Borrowing on Dairy farms

Talk to your Teagasc dairy advisor at your local Teagasc office if you need help with business planning or applying to the bank for funding.

The Teagasc Dairy Specialists issue an article on a topic of interest to dairy farmers every Monday here on Teagasc Daily. Find more on Teagasc Dairy here