Specialist Finance Primer: Farm financing

Mortgage Introducer

July 25, 2018

Robert Suss, co-founder UK Agricultural Finance

Given the uncertainty of the effects of Brexit on the agricultural community in the UK there has been an increase in the rural community looking at diversification strategies as a way to buffer the potential loss of subsidies.

One of the challenges however is that following the financial crash funding the agricultural sector is difficult and many traditional sources of finance have disappeared.

UK Agricultural Finance is a specialist business lender to the agricultural sector that offers traditional, responsible lending to farmers throughout England, Scotland and Wales.

Farm finance is on the rise again and is becoming an attractive sector as farmers need loans that can be secured on real assets as farmers now need to find new sources of capital to sustain, grow and improve their businesses.

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 business lenders, can really help their clients build their businesses.

Farm finance is an attractive sector for brokers as competition is limited, loans tend to be large and secured against real asset. 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.

Some of the reasons why a farmer would want access to finance: –

* Diversification, farmers need capital to diversify and build new businesses

* Purchasing new farmland when additional acreage or a unique property opportunity may come available and often at short notice

* Property finance allows farmers to develop, renovate or repair property for capital appreciation and income generation

* Renewable energy projects can be a great source of additional income and add real value to under-utilised land on a farm, or even turn waste products into revenue

* Livestock Finance is utilised by farmers to expand their livestock holdings

* Recovery & Restructure finance is needed when financial pressure is acute and a facility can provide a window to take control and rationally plan

* Tenant farmers often have a right to buy their land

* Generational Transfer when farmers who are looking to transfer their farm to the next generation can use a facility to achieve this

The farmers 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 rolled into a term facility once completed.

What should a broker look for when sourcing this type of financing?

* Brokers should look to work with specialist lenders who understand the complexities of agricultural finance

* Look for 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 have first charge collateral over agricultural land and agricultural property

* A non-reliance on subsidy payments

* A business plan demonstrating understanding and commitment to success of the business

Agricultural loans, while overlooked by many brokers and master brokers has recently got 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 in the region of 1% a month

* Term loans which are typically 3-7 years are in the region of 6.5-9%

Rural property and rural businesses is a highly specialist area 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 understand business lending against agricultural land where a ‘one size fits all’ doesn’t work.

It’s important to work with 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 key given the complexities of the sector and the need to move swiftly to provide financing and the ability to adapt a loan to suit the borrower’s circumstances.

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