By Alasdair Macnab

Covid 19 has impacted the national and world economy. A depression is being forecast, and that doesn’t mean more rain although at the time of writing most of the UK needs rain badly.

How bad this depression will be remains to be seen. We, as farmers cannot do anything to influence what will happen but we can ensure our businesses are set up to meet the challenges.

My maternal grandfather started farming in Caithness in the early 1920s. His rent for the first few years was paid by fencing and watering the farm. Hempriggs Estate supplied him with wire, posts, strainers, gates, water troughs and pipes. There were no overdrafts then. Credit was provided by the suppliers and accounts settled six monthly. How things have changed!

I was in the local mart a few months ago on a sale day. I bumped into a bank manager and we talked about the state of farming and the changes in banking. He regaled me with a worrying story.

A customer had called him the day before wanting to arrange to borrow a couple of hundred thousand pounds to pay for land bordering his farm which had come on the market and his offer was successful. It was due for payment at the time we were having this chat. He had to explain to his customer that it could not be done because there was quite a bit of work to be done before the money could be released.

I’m sure you can work out the ensuing conversation. It consisted of very many single syllable words including accusations that the bank manager’s parents weren’t married when he was born.

The circumstance of this scenario makes me wonder, if, in a rapidly changing world, are we in the farming industry keeping up to date with the changes and the pace of change going on in the wider world, in particular the impact on our industry?

My favourite daughter works in banking in London specialising in anti money laundering and financial fraud and crime. It is complex work. By the way I have only one daughter!

When she graduated, this area of banking was just starting to develop. She has since accumulated a string of diplomas and certificates training her on the rapidly increasing complexity of what is happening out there. Very interesting I hear you mutter, but what has this to do with farming?

Financial fraud has impacted how money is loaned, to whom, how that risk is assessed and managed. Banks, following the collapse in 2008, have developed complex and strict methods of identifying and managing credit risk. That is the risk to their business, their shareholders and their money. They do this by assessing the risk your business lending poses to their money and that in turn determines the interest they charge. How do they do this?

For this article I have consulted bank managers from different banks to get an overview of how banks go about assessing what they will lend you and what they will charge you for the privilege.

In banking terms, farming is small beer and relatively low risk. Industry and finance are where the big borrowing lies.

In a previous time you had a local manager who knew you, knew your family, business, ability, resources and track record. He or she would know what they could lend and what the ability to repay the debt was.

These days are gone. The relationship is now distant. In some cases you never meet the manager. Many of you may not have a banking relationship manager.

What is the bank really looking for? What information does the bank need?

The key issue for the bank is assessing your ability to repay the debt. The key issue for you is showing the bank you can repay this debt.

Your assets and liabilities come further down the list. A good asset liability balance will not guarantee getting a loan. A well constructed business case for a project that’s clearly thought out is what’s needed to obtain finance.

The manager will write a report on the farm management team whoever that is. The report will discuss matters such as your track record in farming or another business, your attitude to the business and its performance, your professional and financial ability and your ambition. Banks find a CV on each member of the farm management team useful in preparing this report. It gives them an idea of the skills, abilities and experience backing the business.

Other issues the bank is concerned about are some that we don’t often think about such as what succession planning is in place. Are those who will take over the business involved in applying for this loan? What management meetings take place, who is involved in them? Is there external professional involvement in the business or project? Who are they? What training and continuous professional development is going on? These give the bank an overview of how well prepared you are to take on whatever the loan is for.

Perhaps the most difficult part of the application is dealing with change (yes I do keep on talking about change), particularly in the modern world. Market volatility, contract specifications, target markets are the key points. No-one foresaw Covid 19 and its impact but now we are aware of something like this happening again.

As I noted earlier they key issue for the bank is repaying the debt. Therefore sensitivity of your costings is a vital consideration. What if you suffer crop loss, disease, staff leaving, price changes? The impact of each of these risks needs to be quantified and your plan to deal with them should they happen.

Where will the repayments come from? The bank needs to protect its lending. To do this they take security over something you own. The bank will also want life and critical illness insurance.

The next part is the business plan. This is the document which shows how your business or project will be successful. How many farms have a business plan? Do you have one? If not, why not? It’s not that much different from your animal or crop health plan. It sets out what you will be doing, how it will be done, what is needed, what it will bring in, the costs and identify when payments can be made to the bank. There is no point in taking a loan for a project that makes no money for two years and start repayments straight away. A business plan will show that.

Who should write the business plan? You should. It’s your business. You will believe in it and make it work. By all means get someone to do the actual writing and set it out. If someone else devises it you won’t deliver it. Will you even agree with it?

One of the key components of your business plan is a cashflow projection. This is an estimate of cash in, cash out and identifies the peak borrowing facility you will require and when.

The business plan and cashflow needs to be compared regularly to what is actually happening and when they do not agree you need to find out what has happened and why. That can be good performance or poor performance. You also need to keep the bank informed.

Keeping the bank manager up to date with what is going on is the most important part of the relationship. Be proactive, even when it is going wrong. They’ve seen it all before and are keen to help your business move forward. After all they put the request for the loan forward in the first place and failure will reflect on them too.

Banks are in a different place than they were before 2008. The new Banking Regulations have caused issues with lending. They have changed the way risk is looked at. Longer term borrowing is more expensive and there is greater focus on long term affordability. You need to sell your business and be ready for questions around assumptions and succession if borrowing for longer term.

The assessment of your credit risk is made by a bank credit team and a computer programme. The calculation of your borrowing limit and interest rate is made the same way. Much of the autonomy of the bank manager of old has gone and in its place is the new system of ensuring the risks are covered and accounted. That is why so much preparation is needed to secure a loan.

If you don’t get the answer you were wanting it’s easy to blame the bank manager but perhaps you must take some responsibility. Did you provide enough information or detail to assist the decision making process?

That is why the banker I met in the mart could not authorise the customer’s loan at short notice. This is what prompted me to write this article so none of you fall into the same trap. I trust you have found this column useful.

Having a strong asset background is no longer the key to getting finance – demonstrating the ability to repay debt is the answer.

One parting shot from a manger was: “We are heading into a tougher economic climate the old phrase ‘cash is king’ remains strong.”