No two farms are the very same and neither are two farm loans. Every farm system has differences. Therefore, most applications for loans will be different. Before taking on extra debt of any kind, it is important to have a good grasp of the available cash to meet loan repayments. Be clear on how much you need, over what term and on what way your repayments will be structured.

Most on-farm investments focus on housing, milking parlours (new or upgrades), cubicle accommodation (outdoor or roofed) and slurry storage. Other investments that can require funding include grassland infrastructural development such as roadways, water provision and reseeding programmes. All of these investment are eligible for funding.

Banks typically lend 70% of proposed spend, but in many cases farmers won’t have 30% of the balance in cash to put in

No matter what loan application is being made, historical farm accounts are an important way in which the banks assess a proposal. Banks typically pay out loans in arrears, subject to receipt of suitable invoices from contractors/creditors. It is important to structure the loan over the useful life of the asset in question. For example, the useful life of a milking parlour is 15 years. The loan for the parlour would be structured and termed out over 15 years.

Most Irish farmers are typically risk-averse, meaning they like to pay off bills as quickly as possible. However, this may lead to problems with cashflow further down the line.

Banks typically lend 70% of proposed spend, but in many cases farmers won’t have 30% of the balance in cash to put in. In this case, farmers may need to use land as equity. Generally farm buildings are borrowed for over a 10- to 15-year term. The longer the term, the lower the repayment, which will help business cashflow. However, there is a cost involved in stretching the loan term in that over the term of the loan, a greater amount of interest will be paid.

Interest rates

Typical interest rates range from 3.5% to 6% for secured loans, depending on the amount of funding sought, with larger loans attracting lower interest rates. Unsecured loans are typically charged at above 7%. Overdraft interest rates are typically above 8% regardless of whether it is secured or unsecured. With interest rates at all-time lows, it is a good idea to stress-test the loan by checking the effect that an increase of 1% or 2% in the loan interest rate will have on loan repayments.

The term of the loan

This depends on what the funds will be used for. Typically, land loans can be given for a max term of 20 years. Farmyard development is over a term up to 15 years. Machinery purchase is typically for a term of five years. Breeding stock can be financed over seven years. These are usually for secured loans. Some banks may offer unsecured options on all of the above up to a maximum of around €65,000 but only for a maximum of five years, independent of what the funds are being used for on farm.

Running costs

Once the new facility is in place, there may be extra running costs involved in operating it, such as higher electricity bills due to newly installed automatic scrapers, higher straw demand due to new loose lying area, etc. Try to get a handle on these costs as far as possible. Alternatively, there may be cost savings, due to better building design, better layout of tanks for improved agitation, giving a saving in time and diesel for agitation.

Borrowing through your co-op

Milkflex is a loan offered by participating co-ops that has in-built "flex triggers" that can adjust the repayment terms in line with movements in milk price, thereby providing farmers with cashflow relief when most needed. The interest rate charged on Milkflex loans is currently a variable rate of 3.75% above the monthly Euribor cost of funds, with a Euribor floor of zero. There is also an arrangement fee of 1.25% (4.18% APR).

Loan repayments are automatically deducted from the supplier’s milk receipts by their participating co-op. The profile of repayments reflect the seasonal milk supply curve, with no loan repayments – interest or principal – during the low milk production months from December to March inclusive.

Loans are available for amounts of between €25,000 and €300,000 for a term of eight years (can go to 10 years if flex triggers are used). No security is required. Lending decisions are based on the merit of a farmer’s business as opposed to the asset value of the farm, subject to meeting eligibility and underwriting criteria.