De-risk your borrowing when in a strong financial position. When talking to a lender about borrowing its always easier to negotiate from a strong position rather than when under financial pressure.
Andrew Troughton looks at some areas where we have been helping farmers reduce risk and reduce annual costs:
Review all borrowing – restructure overdraft and short term debt.
Overdrafts are very insecure and in terms of risk, at the top of the list as they are instantly callable by the lender. They work well for seasonal borrowing that is repaid each year but are sometimes used as an easy source of long terms finance. A core debt then builds up that remains year on year. Restructuring this onto an interest only or long terms repayment loan immediately saves the annual renewal fee and puts the money on a more secure footing. If possible it’s worth looking at a long term loan with the ability to pay off chunks without penalty. If the business can afford it, a repayment loan will reduce the capital, but for some interest only is more advisable, for example, if a property sale is planned in the future.
Check how long the term of your loan really is.
In many cases what seems to be a 25 year term has 5 year breaks so actually only gives you 5 years of security. This should mean the loan came with cheaper finance as banks can find 5 year money cheaper than 25 year money, but with the obvious risk that every 5 years a review is possible. For some these will remain preferable but the industry expects Government regulation and the changing global finance market to means breaks are more frequently exercised. To counter this, it is worth considering switching some debt to a genuinely fixed loan such as AMC’s 30 year fix.
Fixed rates are at historic lows which will not last for ever and so in the next 12 months we believe there is an opportunity to review and restructure existing debt or put new borrowing onto a more secure long term footing.