Farm business: different types of borrowing
There are many differing types of finance available for farm businesses. Find out about the different types to discover which is suitable for you.
Planning for borrowing
When deciding which type of finance best suits your business you need to know:
- What is it for?
- How much do I need?
- What are the repayment terms?
Long-term borrowing, or long-term liabilities as it is written on the balance sheet of farm accounts, are secured against assets. This borrowing has a set term and repayments so the lenders know what repayments to expect and cannot request higher repayments.
Long-term liabilities include:
Specifically designed for farming businesses, the mortgage is secured on your land and buildings and is often on a much longer term to a bank loan.
Mortgages are used for farm businesses to purchase land and buildings over a long lending period.
Generally quick and straightforward to secure the funding needed, bank loans are usually provided over a fixed time period.
Bank loans can be capital repayment or interest-only. They are often secured over the land and buildings.
Bank loans are used by businesses to expand their current farm business in a range of ways; for example, building a new calving shed.
Hire purchasing is a financing solution suitable for businesses wishing to purchase assets without paying the full value immediately.
The customer pays an initial deposit, with the remainder of the balance and interest paid over a period.
This will be used to purchase expensive machinery or tractors. The business can finance the machinery or tractors over a 1–5-year period and pay a monthly amount to the dealer or finance provider.
Alternative finance options
The other borrowing listed on the farm accounts balance sheet is current liabilities. These are unsecured and the lender could request repayment of part or all the remaining balance within a short period of time.
Repayment of these could impact business operations if a sale of assets is required.
Business overdraft borrowing takes place when the farm makes payments out of its current account which exceeds available balance.
They are provided over a fixed period or as a rolling facility with no end date.
If you need to increase the overdraft facility on your farm accounts, you may need to speak to your bank manager.
Overdrafts can be used to manage peaks and troughs in cashflow and are useful as most operations require cash up front with an expected return over a length of time, for example growing a crop.
Business credit cards
This is a facility that has a spending limit and provides short term credit. Credit cards can be useful to allow employees to make low value business expense purchases such as diesel for a farm vehicle.
Trade credit is when the farm purchases goods and/or services without making immediate payment. There are often credit terms which allows the payment of the goods or services within a set time period.
For example, a dairy farm ordering feed each week which is paid for at the end of the month as the credit term states payment should be made within 30 days of delivery.
Hire purchase or lease?
When purchasing machinery there are several options available to enable you to finance the machine.
Hire purchase, as explained above, is a way to finance ownership of the machine over a set time period.
Finance lease is where a customer hires the asset and pays a leasing company a monthly rental for the machine. At the end of the lease period, you can either continue to use the asset by paying a secondary rental or sell the asset to an independent third party for a true and fair market value.
This is often used to lease tractors or other large machinery as it avoids the need for a big deposit payment.
Operating lease or contract hire is the rental of an asset from a lessor. Crucially, the ownership of the asset does not pass to the lessee, but they do have unrestricted use of the asset and are responsible for its condition.
Again, this is commonly used to lease tractors and large machinery. There are often set terms such as hours, usage and repairs.
What is peer-to-peer lending?
Peer-to-peer lending is as simple as one person lending money to another.
There are a number of finance providers who facilitate these loans. Peer-to-peer lending is often security based and is more expensive than conventional lending.
The type of lending is often used by farming businesses in financial difficulty or struggling to get finance by conventional means.
Peer-to-peer lending can give struggling businesses a chance to breathe before taking action to change and improve the business.