The 23 March 2021 marks one year since the country went into its first lockdown. We look at the effects the pandemic has had, and is having, on UK farms and rural businesses looking for finance – and how you can create a successful mortgage application.
Since 31 March 2020, the Government has guaranteed loans of £45.6 billion in Bounce Back Loans, £22 billion in the Coronavirus Business Interruption Loan Scheme and £5.3 billion through the Large Business Interruption Loan Schemes. (Source: British Business Bank). This is staggering compared to 'normal years'. For example, UK Finance figures published in January 2021 show gross lending to Small and Medium Enterprises (SMEs) in the first three quarters of 2020 alone was more than double the annual total for the whole of 2019.
Some farm and rural business will have accessed these loans and received the free 6 to 12 months capital and interest repayment holidays. The businesses who took these loans early on will be having to plan to start making their repayments now – and so careful forward planning will be needed.
The Chancellor recently announced the extension to the length of the Bounce Back Loan (BBL) from six to ten years, which will alleviate cash flow pressure for some. A £50,000 BBL had repayments of capital and interest of £874 per calendar month, which could now reduce to £504 pcm if loans were successfully extended for 10 years.
The impact on your new borrowing
However, we have been advising our clients to be cautious if wishing to apply for these Government backed schemes. Banks’ future lending decisions will be affected by any loans and liabilities a business will have, including those from Coronavirus support schemes. So, if you are still thinking of applying for such a loan, please beware that it could impact your future borrowing abilities.
With banks taking on more debt, they will become more conservative with their new lending. They will look at all applications with a much tighter scrutiny - especially if taking on clients and their debt that are new to them and there is no banking track record.
Certain sectors will also be examined more carefully by lenders. We are already seeing agricultural lenders have a lower appetite for farming businesses with a high proportion of commercial incomes that include residential and commercial lets.
With the backdrop of Brexit and potential changes to the supply chain and markets, coupled with subsidies being replaced with the Environmental Land Management (ELM) scheme, even true farming incomes will begin to be looked at more carefully by lenders.
What you must do
To achieve the greatest chances of success, any future application for borrowing should include a picture of your business before, during and after Coronavirus including:
- Details of your experience and background in the sector or business you are in. This will give banks confidence that you can deliver what you promise.
- A description of the changes to your business because of Coronavirus, highlighting any positive gains.
- An explanation of why Bounce Back Loans and CBILS were taken (if they were) and how that money was used.
- A demonstration of the serviceability of the business. This should be a cashflow of at least 3 years accompanied with a realistic set of assumptions.
- An explanation of how your business can flourish post-Coronavirus. For example, think about any future market opportunities for local produce or healthier eating and your new routes to market.
- Evidence of how similar local properties are performing.
Quality financial information, backed up with solid evidence and assumptions, will help lenders understand how much borrowing your business can afford, and give them confidence to lend in an uncertain time.
As borrowing becomes more difficult, the support of a professional who can present your plans and information in the best way to the lenders who are most likely to say ‘Yes’ will become even more important.