How to get finance for a diversification project.
The main issue with financing a farm diversification project is that it often falls outside what traditional lenders are comfortable with. This is typically because it’s a new venture and the lender is worried about it not working out. Statistically only half of business start-ups make it beyond their 5th year so it’s fairly easy to see why lenders are often nervous.
We believe that this statistic is a lot lower when it comes to farm diversification for a number of reasons:
- There is an existing business behind the diversification.
- There are already property assets that are owned or rented on a long term basis.
- Most diversification projects are started due to a trigger i.e. an interest or particular resource on the farm.
Working a lot on the planning and funding side, we see projects at the early stages and so can work with the farmer developing the project to help it along. On the financial side the funding splits into two broad categories:
Funding diversification with no existing business.
In many ways this is harder as you have no track record in terms of showing the ability to run a business. To overcome this we build up a CV, budgets and a business plan for the new venture. Often previous jobs or experiences provide good background and it’s important to highlight these.
It’s also important to show what you are risking. Lenders like a proposal when you are sharing in the risk rather than asking the lender to provide all the finance. So if it’s possible, it’s better to match the finance or at least put in what is possible, to show commitment.
If you do own the property on which it’s based, then providing this as loan security is an excellent way to showing commitment. Having a secured loan will also make the terms much more attractive so make the cost of the finance cheaper.
Funding a diversification project within an existing farm business.
From a finance viewpoint this normally makes things easier as you will have a track record (in the form of tax accounts) and a trading relationship with your existing bank. These details can be summarised and help prove competence. Even if recent falls in prices have led to a loss, accounts show much more than just profit or loss. They can be analysed to show trends over the years and also exceptional or one off expenses that should not occur again for.
It is still important to detail the background and proposal, but with an existing business it’s good to comment on labour and resources. The lender will want to know whether you can cope with both enterprises.
Fund some cash flow for the early years.
One common error when diversifying is not to allow anything for cash flow whilst the project develops. No new business would be expects to go from 0 to 100% capacity in the first month of trading and so allowing for a lower income is important. It’s always best to be cautiously realistic. Lenders credit departments (who approve the loan proposals) see a lot of new proposal and so are very good at spotting what realistic and well thought is through.
There are also bound to be unknown costs in the early years for example a tax bill or some regulation that leads to increased cost. Having a contingency is therefore a good idea and shows the lender that you have allowed for unforeseen costs.
Where do I start with diversification finance?
We have been finding diversification finance for farmers and landowners for many years and so have considerable experience in developing projects and businesses and finding the right finance package. Carver Knowles are AMC Agents and work with many other lenders in the West Midlands and South West.
We are always happy to provide a confidential and no obligation review of a finance proposal. If this is of interest please email us and we can provide a basic questionnaire for you to complete to allow the initial assessment to be made.