Rural communities around the UK have been looking at ways to diversify their income. This has been driven by the continuing uncertainty over Brexit, leading the agricultural sector to find new revenue streams in order to offset potential losses of subsidies.
With no way to know what the future will hold, many farmers are turning to alternative sources of income. There are several strategies in use; some farmers are installing renewable energy facilities on their land, generating power from solar or biomass sources. Others are seizing on opportunities to enhance their farm’s resilience, investing in additional acreage or livestock.
This diversification has been challenged by a lack of traditional funding sources in the wake of the financial crash. Banks are reticent to fund farmers’ projects, which hampers their ability to grow and diversify. This has been recognised by the Government, who stated that “farming requires high levels of investment and the lack of sufficient funding is a major threat to these businesses and their prospects”.
Farm finance has been growing in recent years. As farmers need more and more capital to create secondary and tertiary income streams, the appeal of alternative secured finance options are becoming evident.
Finance brokers have begun to see the appeal of agricultural finance; limited competition, large loan sizes and real asset security all make this sector attractive. It’s important to bear in mind, though, that agricultural finance is not simply bridging under another name. The demands and requirements of farm finance are very different and vary significantly from one borrower to the next. Commercial brokers who intend to enter this finance market must gain a strong understanding of their customers’ needs in order to be successful.
The requirements of agricultural finance are varied, and can include many different purposes including:
Investing into new business areas and there are many different ways to do this; an apple farmer might start producing apple juice, a milk farmer might start making cheese, or set up a farm shop. As noted above, diversification is becoming more and more prevalent as Brexit looms.
Securing new acreage, or seizing unique opportunities at short notice. This can often demand that finance is put in place at short notice, since land might be sold very quickly.
Developing, renovating and repairing property for income generation and capital appreciation. This can include domestic property such as the farmhouse, or the creation of new agricultural building, such as cattle sheds.
Electricity generation can often let farmers monetise an under-utilised area of their business, and can be fairly simple to install. Biomass allows farmers to generate electricity from waste, while solar energy is efficient and extremely low-maintenance.
Purchasing additional herd animals. This can improve the resilience of their existing herd, or allow them to answer demand for different products; Jersey cattle for milk, or Gloucester Old Spots for pork.
Farms are susceptible to strong annual variations, strongly dependent on local weather. This finance can help alleviate extreme pressure and provide breathing space in the wake of a bad year.
A tenant farmer is one who resides on land owned by a landlord and in many cases, these farmers have the right to purchase their land, and may well wish to do so.
Intergenerational transfer of farms is one of the biggest challenges facing farm families. Transferring income, management and assets, and ensuring financial security and peace of mind for all involved. Generational farm finance can enable farmers to pass their assets down to the next generation intact.
Farmers must provide a business plan that outlines how their loan will be repaid. Will this be with income or capital? Will they refinance, or aim for a term facility once completed? A strong, well thought-out plan is essential, and should clearly demonstrate the farmer’s exit strategy.
Agricultural finance requires an experienced set of hands. Finance brokers should find lenders who know how agricultural finance works, and who understand the complexities involved in financing a farm
The farmer must be able to show that the loan is affordable, that it adds value to their business and that they have a clear exit strategy in place.
Farm finance brokers should seek a first charge against farm land and agricultural property. Second charges are a useful way to “top up” loan security, but be wary of securing a loan solely with second charges.
Avoid borrowers who rely on subsidy payments. These borrowers may well lose their subsidies in the future, which will impact their ability to repay the loan.
The borrower must have a strong business plan in place that shows their commitment to the business. They should be looking for robust long-term growth, not a fast fix to their present situation.
Agricultural loans have attracted a lot of attention in recent years because they represent a significantly under-serviced sector. Farm finance brokers and master commercial brokers have recently turned to agricultural finance because of the large size of a typical loan; bridging loans in the region of £2 million, and term loans around £500,000. These generate strong finance broker commissions, and are steadily generating more and more interest.
These short-term loans can be used by farmers and typically cost around 1% a month. Bridging loans can be borrowed for between 12 to18 months. Be aware that there are arrangement fees of around 2% in addition to some lenders charging an exit fee around 1%.
Longer-term loans from 3-7 years are around 6.5-9% per year. This type of farm finance gives farmers more time to work on farm diversification for larger projects or where substantial change is needed to realise the financial benefits to the farm.
Rural business and property is a highly specialised sector. Farmers face many unique challenges that aren’t present in many other areas, requiring a flexible approach and experience. Agricultural finance is well worth developing and can pay significant dividends.
Brokers should actively build relationships with specialist lending teams who have experience of lending in this sector. A “one size fits all” approach simply doesn’t work in the agricultural finance industry, and lenders must be flexible in order to meet farmers’ needs. Finance brokers should seek out lenders who focus solely on the agricultural sector; the needs of agricultural finance are too complex, and the requirement to move quickly demands a fully dedicated team of experts.