Finance round up

The past few years have seen the borrowing market change. We have had the emergence of new lenders and an increase in borrowing costs due to base rate increases. 

We seem to be now getting to a position of the “new normal”, but who knows how long that will last with a changing global world. 

The Bank of England have now cut interest rates to 3.75%, and there are wider predictions that we should see this continue to come down and stabilise at around 3% -3.5%. 

This is positive news for farming businesses with variable rate borrowings, as they will see a reduction in their monthly or quarterly repayments. 

For savers, this will have the impact of reducing savings rates. 

Now that rates are starting to reduce to more historically normal levels, there is the discussion again around fixing or not fixing any new or existing debt. 

For those in this position it is important to consider the whole business and your exposure to interest rates. 

When fixing debt, it is also important to understand early repayment charges on the debt. 

Some fixed rate loans have a fixed redemption cost to pay off the loan which can be a set % of the balance, and others use market type products where the redemption cost is dependent on the interest rates at the time. 

For farming businesses taking out new debt there has been a significant rise in the number of partially amortising loans being taken out. 

This loan product is a fixed commitment by the lender to lend you the money for a 5, 10, or 15-year period, but often the repayment profile of that loan is longer, typically 20 or 25 years. 

These products can often be cheaper from an interest rate perspective as the bank is committing to the loan for a short period. 

It is important for farming businesses to understand that at the end of the commitment period you will either have to repay the loan in full or refinance it to a new arrangement. 

If you have to refinance to a new arrangement this can come with new arrangement fees, interest rate margin, valuation costs etc. 

You will also have to re-prove to the bank that the business can service the debt, which if this falls at the wrong time (e.g. milk price dropping) could leave your business in a difficult situation. 

In summary, finance in terms of overdraft, term loans, and HPs remain hugely important to help farming businesses grow and expand. It is important that you understand all your finance arrangements and your exposure to risk.