What is diversification finance? Lets find out so you can better understand agricultural finance.
As any farmer knows, there is little predictability in the world of agriculture. While one year may bring a bumper crop, the next may see a slump in crop prices or demand for their goods - when this happens, farmers stand to suffer greatly from a decline in income, which can cause significant issues when a farmer relies on a single crop. Farms which specialise in a single crop are putting their eggs in one basket, and with no secondary income streams these farms are exceptionally vulnerable to the many outside influences which can affect a farm’s prosperity.
By investing in alternate sources of income, farms can benefit from both increased profits and increased resilience. Because farms with more than one income stream are less vulnerable to fluctuations in the market, they have some defense from the external factors which can adversely affect a farm’s yearly yield. From farm shops to horse riding, farms stand to benefit by diversifying their income streams, but accruing enough capital to invest in these alternate incomes can be difficult for a farm - the day-to-day running costs of most agricultural enterprises preclude saving money for later investment, and farms generally demand that profits are reinvested immediately.
Farmers must therefore turn to agricultural finance specialists when seeking to diversify their farms, and by obtaining a loan from a bridging lender they can quickly secure a stable source of funding for many different enterprises. Bridging loans are ideally suited for diversification because they are uniquely adaptable, and may be quickly secured for almost any purpose. This guide will cover the main reasons why diversification is vital in agriculture and how diversification finance can aid farmers in developing a resilient, well-balanced farm. It’s important to bear in mind that a bridging loan is a financial product, and as such must be repaid with interest. Before committing to a loan of this type, farmers must seek expert financial advice to ensure bridging finance is the right solution in their circumstances.
Farmers are in a unique position, and commercial agriculture faces many more challenges than other business sectors. Key amongst these is the demand for farmers to specialise in one particular field; the farm that produces the greatest number of crops is in a better position for bargaining when it comes time to sell their products, so farmers are incentivised to dedicate their entire farm to producing as much of one crop as possible in an effort to get the best price. Specialising in one product, though, has it’s disadvantages, because the farmer is then entirely reliant on the success of a single crop: if the market price of this crop falls, if bad weather leads to a poor harvest or a new disease takes hold, the farmer could be entirely ruined.
To avoid this reliance on one single product, farms can seek to bring in income from alternate sources. As pointed out above, there are significant benefits to a farm that produces a lot of a single crop, so farmers won’t want to diversify at the expense of their main produce. However, by choosing investments wisely it’s possible for farmers to gain the best of both worlds, by selecting additional income streams that will do little to impact the production of a farm’s main crop. For instance, setting up a farm shop or delivery business is a great way for farms to bring in a little extra money, and one which takes up very little extra space. Initial investment in additional premises or vehicles can be a problem, though, when farmers struggle to build up capital.
Sourcing finance for diversification can be a tricky proposition for farmers, because few mainstream lenders fully appreciate the challenges faced in agriculture. All too often, farmers are denied financial backing because they’re unable to meet the “checkbox” requirements of traditional lenders. However, there are several specialised providers of agricultural bridging finance who can create bespoke loan packages for their customers, matching their clients’ needs to the terms of the loan. Bridging lenders are typically smaller organisations of highly experienced finance professionals who work quickly to provide the funding that their client needs. Unlike large high street banks, bridging lenders have little in the way of bureaucracy or red tape to cut through, and can turn a loan from application to approval in a very short space of time - often less than a week, and sometimes in as little as 48 hours.
Bridging finance is a form of short-term lending that provides large, secured loans for a wide variety of purposes. Bridging loans are used to “bridge the gap” between the need to make a purchase and the ability to pay for it; they’re often used to get a project up and running before a mortgage can be put in place, and are ideally suited to the agricultural sector. As a form of secured lending borrowers must put up some collateral when applying for a bridging loan, so farmers must carefully consider the costs and responsibilities of this form of finance; should they fail to repay, the lender could repossess their assets.
When seeking to diversify a farm, it’s important for farmers to understand how their money will be invested. While bridging loans are an ideal way to get a project up and running, they are not a long-term financial solution (few lenders will loan for more than 18 months, though there are exceptions). Typically, a bridging loan will be repaid as soon as possible in order to keep costs down, and farmers should make sure that they have a viable “exit strategy” in place before applying for a bridging loan. In many cases an exit strategy consists of a remortgage, or the sale of an existing portion of the farm - generally, a bridging lender will stress-test each applicant’s exit strategy before approving their loan, in order to ensure they’re a secure client.
A bridging loan is a short-term loan secured against property. It allows you or your business to “bridge a gap” until either longer-term finance can be arranged, or the underlying security or other assets can be sold.
There are many ways in which businesses can use a commercial bridging loan. Common uses are to cover short-term cashflow issues or to finance tax liabilities. More positively they can be used as working capital and by new businesses as a cashflow injection to acquire additional stock or even to acquire new equipment or premises for the business. Beyond these examples there are a huge variety of ways in which commercial bridging loans can be used.
Yes. Absolutely. They can be very useful in both the above instances and to solve a variety of other problems.