What is the best interest rate I can get? That is a common question I get asked. The answer is, it depends. It depends not just on your negotiating skills, but also on your farm profitability, the ability to repay the loan and the security that the banks can get their hands on. Some farmers will never get the lowest interest rate due to their circumstances. Others who could get it, don’t because they simply don’t look hard enough – now that’s giving money away.

Some farmers I have spoken to are finding it easier to get an overdraft or to increase their overdraft limit. The rates vary from as low as 4% for renewing an existing overdraft, to as high as 11% for a new, unchallenged overdraft, but most are getting 6-7% interest. Term loans range from 4% to 8%, and possibly even lower. Business credit lines or stocking loans are also proving easier to get, with rates varying from 4.75% up to 8% interest.

We have certainly seen a change in the banks’ attitude to lending. Banks are advertising for business and are willing to take on new customers. New sources, such as the funds from the Strategic Banking Corporation, has helped (see page 3). A number of farmers I talked to have got loan offers from more than one bank and were able to chose based on the interest rates and other conditions set out.

One thing that farmers are finding is that paperwork is slow, but having a good plan before you start speeds up the process. It all comes down to repayment capacity. Many are being forced to pay for two solicitors: their own and the bank’s. However, in some cases, the bank gives a sum towards the setting-up costs of a loan.

Interest rate

The interest rate a farmer pays is not only a reflection of his negotiating skills, but also a reflection of the amount of money involved and the quality of the farmer’s business, as well as the proposal he puts to the bank. Banks look at four main elements when setting interest rates:

  • Repayment capacity – based on farm accounts and what is available to service borrowing.
  • Current account – how has cashflow been managed in the past.
  • Equity in the business – especially in off-farm investments, although there is a massive change to what has become acceptable as banks rein in borrowings.
  • Security – Must be valuable, saleable or assignable. Land is still good, but value has been reduced. Farmers should look to minimise security by offering outfarm or splitting off sites from the main farm.

    • Bank meeting checklist

  • Cashflow budget – is it completed and based on sound projections? Have you put in living expenses?
  • Recent accounts – you should have 2014 accounts done at this stage and have an indication for 2015. Do you understand the key points?
  • Stock numbers – have a list of your up-to-date stock numbers.
  • List of money you are owed and money you owe – list out the creditors that owe you money and the debtors who you own money to. Bring in the most recent co-merchant statements.
  • Your requirements – this could be from an increased overdraft to a plan to restructure loans. Have it well thought out and know the reason you are asking. It could be prepared by your accountant or adviser.
  • This is recommended if you already have financial problems or see them ahead.
  • Security – what will you give and how much will it cost? Banks are asking farmers to cover the cost of their solicitors as well.
  • Support – you can ask your adviser to come to the meeting.

    • How to get better interest rates

  • Know you rates – what are you being charged? How does this compare with what’s available?
  • Know your business – do cashflow projections and identify repayment capacity.
  • No surprises – manage your cashflow, don’t go over limits, make all repayments on time.
  • Use professional advice if you need to – make sure you understand it as well.
  • Be prepared to change banks – there are signs that banks are willing to take on new customers and a number of farmers have moved.