Borrowing money is serious business, and you need to understand and honour your obligations.
Access to credit is critical when farmers are expanding, and a willing financier is an important partner in any business.
You will need to be clear about why your farm needs funding – and always try first to use your own savings or cash. If you really must borrow, carefully calculate the amount of money you need by doing a proper cost benefit analysis. With the current low interest rate, borrowing money is an attractive option but the interest rate won’t stay low forever.
Work out how your farm’s profits will be impacted once the interest rate starts rising again. A lender won’t lend you money if you can’t prove that you’ll be able to afford the cost of a rise in the interest rate. Lenders are also very reluctant to lend money for consolidating debt, unless there’s a very strong case for it and you can prove you won’t simply fall deeper into debt.
Lenders may impose strict debt covenants to ensure your farm’s debt levels remain affordable.
After all, a successful farm benefits you, the farmer, as well as the lender, your community and the nation at large.
Here are some things you should and shouldn’t do when you borrow money:
■■ Compile a sound business plan to support your application
■■ Provide all documents the financier requests – on time
■■ Apply for credit in the legal entity where the farming assets reside, for instance a trust
■■ Make sure the farming operation’s tax affairs are in order
■■ Stress-test your assumptions – you need to understand what would happen if your profit drops or if the interest rate rises
■■ Make sure you know how much you can afford to repay
■■ Have an experienced accountant determine the cash-flow impact of loan repayments
■■ Have financial statements updated and available
■■ Match the term of finance to the type of asset being financed
■■ Be transparent with your information
■■ Falsify any information being provided
■■ Assume financiers will not compare yours to other farming operations
■■ Be vague about your requirements – be clear and concise
■■ Borrow more than you can afford to repay
■■ Ignore external factors that could impact the business negatively (like a rising interest rate)
■■ Assume the value of your farm is enough to satisfy the lender; they will do their own valuations
■■ Borrow money to consolidate debt – this usually results in a debt trap
■■ Use short-term borrowing for long-term assets, or vice versa
■■ Use the money you have borrowed for things other than farming