Many farms and rural businesses are finding it increasingly hard to raise bank finance. But, if it’s of any reassurance, it’s not just restricted to the farming industry.
The Bank of England Credit Conditions survey confirmed banks were cautious in their lending at the end of 2019 as they faced heightened uncertainty over Brexit and low confidence in the global and domestic economy. Businesses and consumers were cautious of borrowing too. The survey reports this cautious approach in bank lending will continue into the first quarter of 2020.
Farming is still perceived as a favourable sector within the main banks, but we are seeing the appetite to lend reducing. We aren’t seeing a tightening of Loan To Value (LTV) ratios (in other sectors these sit at 50-65%, while in agriculture it is usually at 70% LTV) but we are seeing a hardening of criteria and less enthusiasm to sanction external incomes and projection-led farming propositions.
This is predominantly because of the international Basel regulatory framework. Under the framework, banks are driven to improve their ability to absorb shocks arising from financial and economic stress. The Basel III measures, introduced after the financial collapse in 2007-09, force banks to maintain a much larger capital base, increase transparency and improve liquidity.
To meet the continual requirements, it has been reported that British banks might have to raise a further €70bn and avoid lending deemed higher risk, particularly to small-medium enterprises (SMEs). Thus the regulations could considerably shrink bank lending.
Before they will agree to lend, banks must be certain of their lending risk. As a result, they are looking for a much greater degree of understanding of the underlying business and the people in the business.
For example, the banks’ due diligence can cause problems for the increasing number of farmers who are taking advantage of the planning rules and converting farm buildings into commercial units and residential properties, leading to increased rent-roll. The banks must decide - is this farmer a landlord who collects rent or a farmer who grows and rears produce?
Scrutiny and due diligence are now the norm
This due diligence has become a fundamental part of lending today and the cautious attitude from the main high street banks won’t change in the short term.
As many banks restructure, the specialist agricultural bank managers on the ground, who would know the farms and the people in the business, are disappearing. Many farm accounts are being moved into call centres who also manage other non-farming small and mid-sized businesses – they know very little about each business on their books and need to scrutinize every application.
This is where a consultant or broker is worth their weight in gold. By dealing regularly with lenders and bank managers within a specific sector, a qualified broker understands the requirements of the lender. They know the pitfalls that make the bank uncomfortable and have the expertise to secure a good deal.
Combined with this, a consultant or broker can coordinate and interpret accounts and other financial information from a reputable firm of accountants. A full professional team is more essential than ever when obtaining finance today.
Best approach for businesses
To meet the banks’ due-diligence requirements, farms and rural business wanting to borrow should consider the following:
- analyse the people in your business and their strengths
- analyse your business and break it down into profitable and less profitable areas of work
- prepare a business plan based on the actual performance of the business and have strong assumptions and supporting information to back up the plan
- build a strong professional team around you that will include consultant/broker, valuer, accountant and solicitor - independent and professional advice is more likely to receive a positive response from the bank manager
- be prepared for a lengthy process - it will take time to prepare the right application, gather the supporting documents, compile the best plan, wait for bank lending application responses and answer lenders queries, meet covenants, progress through valuation stage and finally provide the supporting documents for your solicitor to provide a good report on title.
While high street banks are being constrained, challenger and alternative lenders have entered the marketplace. These offer higher rates and short to medium timeframes to finance new enterprises, building conversions, diversification or to embrace new technology. However, these lenders are not for everyone.
Private banks are becoming a more popular choice in the agricultural sector. These lenders are more flexible on serviceability and affordability and are prepared to consider longer-term interest-only propositions for proposals with good exit plans.
Funding can be found and at good rates and terms, but it must be right for you and your business.