Lending to the Dairy sector
Considerations when providing finance to farmers

 

Loan applications
For loan applications, whilst there are a number of standard documentation requirements, for existing customers we will have much of what is required already of file and we have expert lenders available to work through the requirements below with new customers:
 
1. A completed loan application form is the starting point for most agricultural lending proposals. In addition to asking for details about the lending being sought, this form also captures the important farm information (stock numbers, land details, direct payments, etc.) and additional family and financial information (existing loans, savings, investments, available off farm income, etc.) You’ll get an application form in your local bank branch or through your bank’s website.
2. Most recent 3 Years Farm accounts. Not all farmers will have multiple years’ farm accounts available, e.g. a young farmer starting out is unlikely to have their own accounts. In instances like this, industry average gross margins are used (often in conjunction with projections supplied by the customer) to estimate the income earning ability of the farm.
3. Confirmation of direct farm payments and any off farm income receivable.
4. Most recent 6 months Co-Op statement
5. Most recent 3 Years ICBF Herd Performance Report
6. Six months bank current account statements & 12 months bank loan account statements (new customers only)
7. In circumstances where you are looking to make significant changes to the farm (i.e. convert to dairying or significantly increase milk production) we will ask that you document your plans with a farm business plan incorporating projected future cash-flow. It is important that projections are realistic and sustainable.

Key point: Make sure you have all required documentation when applying for a loan. Help is available from bank experts in advising you to what is required. 

Bank of Ireland will want to understand the purpose for which you are applying for a loan, and what contribution you may be making from savings or other sources to help fund your proposal. In certain cases, particularly where you can show that you have been reinvesting profits back into the farm, this investment can be considered as part of your contribution and up to 100% of the overall proposal costs may be available from your bank.

Will your loan application be approved?
 
The decision to approve a loan can be best understood by asking the following three questions which we will consider when assessing your loan application;
1. Does the customer have a good banking track record with Bank of Ireland or his/her current bank?
What does your banking track record look like? Farmers in general have very good track records when it comes to loan repayments and Bank of Ireland’s experience in the sector has been very positive in this regard.  The better your track record the more favourably we will look on any lending proposal you submit.

For existing customers, the bank will have an understanding of your business and be familiar with the management of your farm current account. New customers will be asked to provide copies of their current account statements from their existing bank.  Current accounts should stay within agreed overdraft limits and revert to credit for a minimum period of c. 30 days each year. If you think that your existing overdraft limit is not adequate or needs to be reviewed, then you should contact your bank to discuss your options. 

2. Does the customer have the capacity to repay the loan?
The key consideration in any lending decision relates to your ability to generate enough income to meet loan repayments and provide for existing commitments, i.e. living expenses, taxation, etc.

When assessing the ability to repay, farm accounts, where they are available, in addition to a completed application form are the starting point. Given the recent volatility in agricultural commodity prices and farm incomes, farm accounts are analysed over a number of years to get an average picture of profitability, investment and borrowing trends.

Based on the information provided, an estimation of the future farm enterprise income is calculated. This income, together with direct payments and any non-farm income receivable needs to be sufficient to provide for living expenses, taxation and loan repayments; both existing and proposed. Annual capital investment requirements are also considered.  

 
An increasing number of farm development and land purchase applications are being received from the dairy sector in particular in recent months. In cases where the existing businesses are of sufficient scale to support the level of borrowings sought; approvals are generally based on historical performance, accounts, etc. as outlined above. 

Where income from an expansion of your farm business will be required to support the level of borrowings sought then your bank will likely request a farm plan with cash flow projections for the growing business. Plans are received in a variety of formats and styles but Bank of Ireland will want any farm development plan to give:
1. A clear overview of what is proposed and what is planned to make the proposal a reality, e.g.  purchase or lease a block of land, erect farm buildings, increase stock numbers, etc.
2. Identify who will be responsible for achieving these proposals, e.g. the farmer, farm family, hired labour, consultants, contractors, etc.
3. Cash flow projections should outline the source of funds (including the bank funding being sought) which will be available to support the proposals and the impact that the development will have on future farm profits.

When a farm plan is based on the expansion of an existing business, the profit levels projected in the plan should be comparable to historic performance. If a significant increase in profitability per unit of output is projected, then the reason(s) behind this improved performance should to be explained.

Finally, you should include the key risks to achieving what you are planning and consider how you can best deal with these risks, e.g.  Is there sufficient scope in your budget to cater for cost over runs? What impact will a change in key input / output prices or interest rates have on your cash flow projections?      

3. What security is available to support the lending request?
Bank of Ireland can typically provide up to €65,000 in overall farm lending on an unsecured basis, and beyond this point security usually takes the form of a charge over farmland which is provided to the bank via a solicitor. While security is a key consideration and the provision of security can prove an obstacle to lending in a small number of cases, it is not a limiting factor in the vast majority of farm lending applications. Irish farms on average are lowly borrowed relative to their value and typically can adequately secure whatever borrowings are sought.

Key point: Loan approval is based on your track record, repayment capacity and security. While all three are important, most farmers score well on their track record and have adequate security; which indicates the key factor is your ability to repay the loan including stress testing for changing circumstances.

Please note that requirements and processes will differ between financial service providers.  The content of the article should be treated as a guideline only in this regard.
  Bank of Ireland is regulated by the Central Bank of Ireland; Lending criteria, terms & conditions apply

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