Loan deals need some flexibility

With many markets remaining volatile and an unwelcome tax bill due soon, now is an important time for farming businesses to ensure they have enough working capital to see them through the short to medium term.

As tough as it may be to assess the financial prospects for the year ahead and beyond, it has never been more important to fully understand cash requirements. Budget honestly and be realistic with your projections and assumptions. Being over-optimistic on the maths will not help you to meet cash flow and working capital needs.

Many businesses faced with a tricky cash-flow projection will automatically look to extend their overdraft to provide trading cash. But if you are nearing your limit or have a poor set of accounts to take into your review, you could be at a disadvantage.

Some farmers instead choose to secure longer term working capital facilities where the facility limit, interest rate margin and annual fee can be agreed at the outset for up to five years. This has the advantage of providing some peace of mind around managing cash and costs, as well as removing the need for an annual review of accounts.

With historically low interest rates, it is also still possible to take out a 30-year loan at some of the lowest fixed interest rates seen in recent times. Although this could be a sensible option for some, it is important not to be dazzled by the rates, because once a fixed rate is entered into, the flexibility to repay the loan early is often lost.

Farming has got used to higher returns and low rates, so people are tending to tie themselves into shorter-term paybacks. This is fine, as long as things are good, but gives you no wriggle room if you hit a tricky patch.

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