Restructuring borrowing for your farm business

Restructuring borrowing or refinancing can be used to reduce loan repayments, freeing up cash within the business. Find out how you can reconsider your borrowing.

Back to: Understanding your finances and farm accounts

Many farm businesses are profitable in their annual accounts but can have a negative cashflow. Farming is a cash intensive business with cash tied up in assets such as buildings, machinery and livestock.

Why a profitable business can have negative cashflow

There are a few reasons why:

  1. The business has bank borrowing and this is being paid off too quickly.
  2. The business has too many hire purchase agreements and cannot afford the monthly repayments.
  3. The business owners are spending too much personally (not very likely in most farming businesses).

It is common that point one can lead to point two. Where bank loan repayments leave a business short of cash, hire purchase agreements can offer another source of finance.

Therefore, it’s important to review monthly outgoings and the terms of the loans you have.

Things to consider when restructuring your borrowing

A refinance of your borrowings could reduce the monthly repayments. A refinance is usually extending the term of your loans to a length that will better suit your business. If you are wanting to extend the terms of your existing borrowing past your expected lifetime, then it is important to consider the next generation who will run the business.

Longer-term loans

The barrier to taking a longer-term loan is often the extra interest payable. However, it is important to remember that you will get tax relief on the additional interest paid and that interest rates are currently very low, so locking into rates today could improve the current business cashflow.

What could this look like (example)?

Home farm is a family-owned and run beef and sheep hill farm. The farm is profitable and is making a profit of £100,000. Over the past few years, they have reinvested in the business to improve their carbon position and increase farm efficiencies.

As a result of the investment, the business currently has the following money owed to the bank:

Total Monthly payment Notes
Overdraft £100,000 £300 Renewed each year
Bank loans £750,000 £6,208 Average term 12 years
Total £850,000 £6,541

Therefore, total annual payments are just over £78,000.

After the family take modest drawings of £20,000 from the business and they pay the above loan repayments, there is little left from the £100,000 profit.

As a result, the business is not generating much cash and the overdraft has been at £100,000 for a couple years now. Any new investments would need to be financed by hire purchase or further bank borrowing.

The family decide to speak to their bank manager about refinancing their existing loans and overdraft into a much longer-term loan.

The bank offers to refinance the existing borrowing and overdraft into a 25-year capital repayment loan. This reduces the business monthly outflow from £6,541 to £4,031 meaning there is £2,510 more cash in the account each month equating to an annual cash saving of just over £30,000.

The refinance gives the family a clear cash surplus in the business easing financial pressure and allowing reinvestment in the business or more flexibility for business drawings.

Useful links

Find out more about different types of borrowing

Learn about debt serviceability