Following the financial crash, funding the agricultural sector was difficult and many traditional sources of finance disappeared. There is a gap in funding, with several high street banks having suspended their farm lending and lost their specialist teams, while many of the new lenders find the sector too complex. Farmers now need to find new sources of capital to sustain, grow and improve their businesses.
Farm finance is an attractive sector for brokers as competition is limited, loans tend to be large and secured against real assets. The ability to achieve liquidity by parcelling up land without damaging the whole business makes for more favourable outcomes if the business plan doesn’t develop as expected.
The government has recognised that farming requires high levels of investment and the lack of sufficient funding is a major threat to these businesses and their prospects. Brokers able to access specialist lenders can really help their clients build their businesses.
Some of the typical reasons why a farmer might want access to finance are:
· Diversification – farmers need capital to diversify and build new businesses
· Purchasing new farmland – additional acreage or a unique property opportunity may become available and often at short notice
· Property – finance allows farmers to develop, renovate or repair property for capital appreciation and income generation
· Renewable energy – ‘green’ projects can be a great source of additional income and add real value to underused land on a farm, or even turn waste products into revenue
· Livestock – finance for livestock is used by farmers to expand their holdings
· Recovery and restructuring – responsive and flexible finance is often needed when pressure is acute, and a facility can provide a window to allow a farmer to take control and rationally plan ahead
· Tenant farmers – these farmers often have a right to buy their land at an attractive price
· Generational transfer – when farmers are looking to transfer their farm to the next generation, they can use a facility to release capital and achieve this.
The farmer’s business plan should demonstrate how a loan helps them generate sufficient income or capital to enable them to repay the loan, refinance with the high street or roll into a term facility once completed.
What should a broker look for when sourcing this type of financing?
· To work with reliable specialist lenders who understand the complexities of agricultural finance and that respond swiftly.
· Opportunities where a farmer can demonstrate a loan is affordable, improves the value of their business and that they have a credible plan to repay the loan.
· Ability to secure a first charge over agricultural land and agricultural property.
· Little reliance on subsidy payments.
· A business plan demonstrating understanding and commitment to the success of the business.
Agricultural loans – while overlooked by many brokers and master brokers – have recently gotten more attention given the size of the opportunity, with average bridge loans in the region of £2m and term loans in the region of £500,000, generating strong broker commissions.
What do farm loans usually cost?
· Agricultural bridge finance loans are typically in the region of 1 per cent a month, although better rates are possible for the highest quality loans.
· Term loans – typically three to seven years – are in the region of 6.5 to 9 per cent, with affordability calculated at 125 per cent.
Rural property and businesses are highly specialist areas, given the many challenges that farmers face, but don’t forget their appeal. Brokers should look to work and build relationships with specialist lending teams that truly understand business lending against agricultural land.
It’s important to look for lenders who work with the leading experts in agricultural valuation, security and restructuring to ensure swift, informed and fair decisions and face to-face underwriting.
Finding a lender who only lends against the agricultural sector is perhaps the best route, given the complexities of the sector, the need to move swiftly to provide finance and the ability to adapt a loan to suit the borrower’s circumstances.
Robert Suss is co-founder of UK Agricultural Finance