The level of farm debt can vary from farm to farm and can take many forms, such as bank loans, hire purchase, co-op or merchant debt, personal loans, general creditors (such as vet, fuel, contractors) and credit cards. Many young farmers may also have mortgages.

Whatever the case, it is very important to be capable of managing these debts, as they will have a huge effect on farm cashflow and overall farm profitability.

There is no point in working from early morning to late evenings with serious concerns about cashflow – this can lead to mental health issues.

In this case, “mind the cents, and the euros will look after themselves”, is not a bad motto to follow. Avoid costly credit and high-interest short-term loans, if at all possible. Being acutely aware of your costs of production and what you expect to get for your produce or animal when selling is vital on an ongoing basis.

The difference between farm profit and cashflow

Understanding cashflow is important, in particular if intending to borrow money. “Free” or “net” cashflow is the amount left over after all outgoings are taken into account (living expenses, taxes, existing loan repayments and any capital expenditure).

This is an important figure as it will prove you can afford to repay a loan. It is possible to have strong profits on a farm but no cashflow, often due to high debt levels and the repayments that are required to service those debts or to pay creditors.

As farming is a seasonal business, budgeting and the ability to pay expenses as they fall due is important. Help and advice from an accountant or an agricultural adviser will be money well spent. Good debt management on farms not only saves money, but will also bring peace of mind.

Reader query

Dear Money Mentor

I am a 50-year-old beef farmer, supporting two children in college, and farming 125ac. I have a bank loan of €150,000, being repaid over 10 years which I borrowed to buy land. I also have another loan of €80,000, over six years which I borrowed to purchase five acres, adjoining my own land. I know I paid over the market price for this. I pay a higher interest on this loan as my own bank wasn’t keen to lend it to me, and I borrowed it elsewhere. My dwelling house is debt free. I tend to use my overdraft – which has a limit of €30,000 – when I run out of cash. I have a credit card but I rarely use it.

Having children in college is expensive but due to COVID-19, I didn’t have to fund accommodation expenses last year. My son has one year to go before graduating, my daughter has another two years to go. As I will need to fund accommodation fees for both children for the next college year, I am considering amalgamating my loans. Do you think this is a good idea? I get a Basic Payment Scheme of €19,000, most of which is used to pay the co-op and other suppliers. My annual bank repayments are as follows:

My loans are all up to date but I know I will be under pressure next year due to college expenses, even though I am getting good prices for my beef animals currently.

I would appreciate your advice.

Denny, Co Cavan.

Margaret writes

Hi Denny,

Thanks for the email. Based on the fact you have five years remaining on one loan and four years on the other, I have estimated that the balances remaining on each loan is likely to be:

Loan 1 €83,220 + loan 2 €45,390 = €128,610

If you applied for a new loan for this amount, and assuming an interest rate of 5%, your annual repayments including overdraft interest would be €24,200, a saving of €14,100 for you. This is based on amalgamating your two loans and extending the term to seven years.

The actual interest rate charged may be higher, if so, the savings will be less. The amalgamation of your loans should definitely help with your cashflow next year, assuming your bank is willing to approve the new loan for you.

An overdraft facility should only be used on a short-term basis, otherwise it can be a very expensive way of managing debt or outgoings. The rate of interest on an overdraft is generally between 7-10%.

Overdrafts are a flexible way to manage short-term cashflow.

Be careful not to exceed the overdraft limit, without prior authorisation, as this will cost you extra fees and interest. Always maintain your current account 30 days in credit over a 12-month period.

It is important for you to avoid going into arrears on your loans, as this may affect your credit rating, which may limit your ability to access credit in the future. It is always advisable to plan ahead and arrange your finances in advance.

It might be a good idea to have a chat with your bank and your accountant/adviser before proceeding.

Best of luck.

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