We are not yet sure how the lending sector will respond. Although, we have increasingly seen the high street banking sector using business models which follow a more risk-averse approach, prioritising serviceability as well as looking for balance sheet strength alongside strong business forecasts and track records to support asset purchase. The corresponding appetite, and flexibility of local banking teams to take on new business depends massively on these factors, which could limit the options of farmers who are considering alternatives in times of need.
Given the above pressures farmers can act now to ensure adequate future finance is available, actions include:
1) Build a positive track record with your current lender - Avoid defaulting on financial milestones, ensure effective communications and keep lenders up to date with business progress. Banks are more likely to offer ongoing support if they are informed and regularly updated rather than subjected to silence when things get tough. In tough times, sticking with your current lender may be your best option. Lenders have duties of care to support existing clients resulting in a greater accommodation of need and support than by switching to a new lender.
2) Ensure accounts are up to date - Lending decisions are disproportionally based on the past rather than future opportunities. If your business has had a bad patch but has improved of late, unless your latest set of accounts reflects this, it might not make any difference to lending decisions. For prudence, provide accurate, timely information to your accountant and request accounts to be produced as soon a feasible after year end.
3) Credible budgets and forecasts - Projection based lending is becoming increasingly hard to secure. As the sector changes and generates new income streams there will be less historical information available to base funding support on. Confidence in any cash and business planning will be a prerequisite to support and the use of a professional to assist with this could add real value to the proposal for the bank.
4) Cash availability as well as profitability is key for lending support off balance sheet – Lenders use EBIDA (Earnings before interest, depreciation and amortization) to assess lending serviceability. This really asks the question “will you have enough cash to pay interest and capital repayments?” The amount of drawings from the business, shown after profitability in partnership accounts, are often a factor that decrease EBIDA, despite a positive business profitability, and can result in a lending decision decline.
5) Take action early – Many businesses leave things too late. The sooner issues are addressed the easier it usually is to get things back on track. Options for remedy often reduce as time goes on.
6) Use BPS whilst we have it - The BPS safety net is a valuable tool to adjust and plan with. We know we have BPS for the 2020 harvest year and sliding reductions after that. For most farms there will still be a significant cash income over the next few years that can support business change. The BPS can be an important tool in building that track record with current lenders.
The above points represent opportunities and challenges we see regularly in our work, we can offer support and advice to get through the changes ahead. Find your local advisor at brown-co.com