New Year Resolutions are frequently made and broken before the Christmas decorations are put away for another year! But one New Year resolution that shouldn’t be broken is to review your finances and banking information on a regular basis. When you’re on top of your farm finances, you’re in a stronger position to manage the business and have more bargaining power with your bank to secure the best banking packages.
Many farmers consider switching their main business banking from one bank to another, but few take the final plunge – perhaps it a case of “better the devil you know”? The most frequent drivers of farmers ultimately deciding to switch banks include changes in staff, different relationship managers, intergenerational changes in the farm or perhaps they want funding for a new enterprise that the current bank does not have an appetite to fund. Whatever the reason, be clear about the long-term objectives of the business and having detailed income and expenditure projections for the year - vital information for negotiating with banks.
If you’re considering switching banks, it is important to examine not just the headline lending rate but the overall package – security required, repayment flexibility, fees and charges (including valuations, legal costs etc.). A Bank offer that may look cheaper than the rest can often end up costing more in the long run when all these hidden costs are accounted for.
Facility Interest rates
Do you know what the prevailing interest rate is on your current borrowings? Interest rates are dropping so maybe now is a good time to refinance or negotiate loans that are on high interest rate. If you have a strong business, there will be competition for your business on the market and you may be able to negotiate some reduction in fees and charges.
When examining your working capital requirements for the year ahead and reviewing your overdraft facility limit, it’s important to start with a cashflow budget and forecast. Banks like to see some sensitivity analysis included in the budget to input and output prices, interest rate changes and fluctuations to yield and output. Try to keep the overdraft facility at a reasonable limit, as most banks require the overdraft facility to achieve a minimum of 30 days in credit per year to allow for a facility to be renewed. High limits can make this requirement difficult to achieve and overdraft rates are also more expensive than term loans, so it may end up costing you more money than you realise in the long run.
By keeping your bank informed about changes and plans within your business, this helps to reduce any element of surprise for the bank and allows them to know what’s coming down the track in terms of capital investment requirements or potential loan repayment shortfalls for the year ahead.
While the introduction of Switcher Packs has made switching banks easier, delays are still common with the transfer of security as this process can be quite cumbersome. Getting Title Deeds for lands released and moved from one bank to another can take some time – it may take up to three months (or longer) for this process to be fully completed. Farmers should consider keeping a reserve in their existing current account to allow for unforeseen direct debits, cheques presented etc. that could impact on your credit rating if they are returned unpaid.
Fixed Rate Loans
If you have entered into a fixed rate loan agreement with your bank, you need to request the break costs from your bank to break (exit) from this agreement. The closer your exit request is to the start of the agreement the higher the break costs. Some fixed rate loans may be on a shorter loan term so weighing up the costs of breaking this loan to extend the loan over a long period may improve cash-flow on the farm, so the penalty may be worth it in the long run.