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05 October 2017

Financing Farm Investment

Posted By: AIB Business
donal-whelton-245

Improved output prices especially in the dairy, beef and pig sectors coupled with the availability of grant aid under the TAMS II farm investment scheme have all contributed to a large increase in demand for farm investment finance in the first half of 2017, says AIB Agri Advisor Donal Whelton.

According to CSO data planning permissions for agricultural buildings nationally, increased by 70% to 1,740 in 2016 compared to 2015. Furthermore the changes introduced in 2017 for completion of works under the TAMS II scheme from 3 years to 12 months is another contributory factor in the increased demand for investment finance seen over the last 6 months.

A recent Ipsos MRBI Agri Financial Services Survey commissioned by AIB and completed in April and May this year identified that 51% of farmers plan to invest on their farm in the next 3 years, with 41% of investment planned for farm infrastructure works. Of those planning to invest on their farm almost half (49%) planned to fund these investments via bank finance. 

If you are considering undertaking an on-farm investment project, I have outlined below some of the key considerations if applying for Bank Finance?

  1. Come and talk to your bank at an early stage. In most instances an Agri lending application form will have to be completed. Your AIB relationship manager can offer guidance on what supporting information will be required for your application, the appropriate structure for your request, and give indicative repayments on the proposed term of the loan.
  2. It’s important to assess the average profitability of the business over a number of years (the previous 3-5 years) rather than looking at the profitability in any one year. This gives a truer reflection of business performance and helps to avoid making investment decisions on the profitability of your farm in a particularly good year.
  3. It’s also important to understand the difference between farm profit and available cashflow to meet new loan repayments. The available farm profit generated in any one year may have to be allocated to other areas before the free cashflow available to fund new repayments is evident. For example, a farmers living expenses, tax payable and existing farm repayments may all have to be deducted from farm profit before the free cashflow to meet new repayments is evident.

I have included below an example of a repayment capacity table (used in conjunction with your audited accounts) which we typically use to assess business performance:

Year Ending

2016

2015

2014

3 year average

Net Profit

 

 

 

 

Plus Depreciation

 

 

 

 

Plus Bank Interest & Charges

 

 

 

 

Plus Leasing

 

 

 

 

Cash available

 

 

 

 

Less Living expenses & tax

 

 

 

 

Less existing repayments

 

 

 

 

Surplus/Deficit available for proposed loan repayments

 

 

 

 

 

In addition, sometimes arranging the finance does not necessarily get the attention it deserves, and common issues/pitfalls continually arise that should, where possible, be avoided. For example:

  • Investing in a farm development because of the availability of grant-aid support, not because it’s aligned with the long-term goals of the farm business.
  • Not having planning permission in place for the development, or if the project is exempt under building regulations confirmation from a suitably qualified professional (i.e. agri consultant / engineer) that planning permission is not required.  
  • Going over budget on a project. This can occur when the project has been poorly costed; additional work has been completed that wasn’t in the original plan, or the spend on the project has been let drift. In many scenarios where this happens, farmers have funded the overrun from their own resources which may be detrimental to the cashflow of the business if that sector has a period of income volatility following the development. It is prudent to build in a level of contingency c10-15% into your plans.
  • Requesting short term facilities for long term investments. I would encourage farmers to term their loan over as long a period as being offered from their bank, as they have the option, on variable rate interest loans, to make out of course reductions over and above the annual agreed repayment structure. Also with any on farm investment, there will be a ‘bedding in’ period and the cash benefits of that investment may not be readily evident for a number of years. It’s important during this bedding in period that the farm is not under cashflow pressure caused by large repayments over a short term.

AIB is committed to supporting the development of the Agri sector. For farm development finance we offer terms of up to 15 years and also offer bridging finance if a farmer will be in receipt of a grant and/or vat rebates on the project. I would encourage any farmer considering an investment on their farm to engage with their AIB Relationship manager at an early stage and see how AIB can help your business in the months and years ahead.

Planning Farm Investment?

If you need advice or want to see how much you could borrow right now, visit our dedicated Agri Business page.

 

Please be aware that all of the views expressed in this Blog are purely the personal views of the authors and commentators (including those working for AIB as members of the AIB website team or in any other capacity) and are based on their personal experiences and knowledge at the time of writing.

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Allied Irish Banks, p.l.c. is regulated by the Central Bank of Ireland. Copyright Allied Irish Banks, p.l.c. 1995.

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