Are loans a better alternative than extending the overdraft?

With poor farm gate prices across all farming sectors many businesses are feeling the financial pressure on cash flow.  Finance is generally tight and banks are not always willing to help.

In the arable sectors yields were generally good, but commodity prices remain stubbornly low and at or near the cost of production. The dairy sector is having a particularly bad time and the beef and sheep sectors are not fairing much better with many struggling.

The Basic Payment Scheme,  which can be paid from the 1st December onwards, will hopefully ease problems, but the payment window runs until the 30th June 2016. It therefore makes sense to look at having a contingency plan in case the payment is not received early.

Banks are often willing to extend overdrafts, but is this the right approach? Overdrafts tend to be quite expensive and there are a number of reasons to look at restructuring the farm overdraft or working capital onto a farm loan.

Most overdrafts go up and down cyclically but when there is a hard core element that is always ‘owed,’ it can make sense to restructure this.

Restructuring an overdraft typically has the following advantages:

  • A loan is cheaper annually as there is no review or annual charge.
  • Interest rates tend to be better for farm loans compared to farm overdrafts.
  • There is an enforced discipline of making regular monthly repayments.
  • It is possible to fix a loan to lock into the current low interest rates.
  • The loan could still be interest only until such a time as incomes improve.
  • There is normally an ability to repay chunks of debt if there is a windfall.

It is important to carefully assess all the options before deciding to restructure as it won’t suit every business.  A detailed financial review should be undertaken look at other debt such as HP, leasing rental and other finance charges.  From this we can build up an overall picture of the servicing cost. Having done this it should then be possible to develop a clear way forward.

As well as restructuring debt there are often ways of reducing HP or rental payments by restructuring or re-arranging these.

If you wish to have a confidential discussion of your position (without obligation), please contact Andrew Troughton or Julie Branfield 01684 853400.


AMC often support farmers with restructuring so if you would like to know more about that specific lending service please take a look at our AMC page