Buying any kind of business can be a very daunting prospect especially if you’re buying into a sector where one of the key variables is beyond your control: the weather. An alternative business funding option might help to support your business against potential risks.
Nonetheless, understanding how finance works in the farming sector and how to secure the right kind of option can help you create a steady cash flow in order to grow now and in the future.
Why you need to finance farms and farmers
Farm financing comes in a variety of forms – be it start-up loans or one to buy cattle and/or farm machinery, both farm owners and their respective farmers must have access to farming alternative funding options in order to expand and diversify.
Plus, cash flow in a farming business can be a very ‘seasonal’ thing – large expenditures around machinery and maintenance as well as those around a steady supply of livestock needs to be made at the start of a farming season, for example. In addition, agricultural finance can also be used to re-finance an existing debt or cover a VAT bill, perhaps.
How to finance farms: how do alternative business funding options work?
Farming mortgages
Farming or agricultural mortgages are the most common type of loans to allow the purchase of farmland. Established farms typically use mortgages to secure the required funds.
Agricultural overdrafts
These are an unsecured form of loan, giving the farmer access to a pre-approved supply of funds, typically ranging from £1,000 to £25,000, which can be accessed and used as required. Overdrafts usually do not cost anything as long as there’s no balance owing. The lines of credit in farming overdrafts work like regular overdrafts although they are for larger amounts and require some form of security.
Farm loans
This kind of loan offers some level of flexibility in the repayment terms. Some loans repay the borrowed amount and interest with each payment, while interest-only loans require the interest to be paid during the term. Therefore, the principal is repaid at the end of the term, which means smaller monthly payments.
Loans for farming machinery purchases are typically acquired through asset financing, a very popular method of farm financing, where the farming machinery or equipment itself is used as security.
What are the costs of farming finance and does it take long?
Farming loans very in terms of both costs and structure. The interest rate is calculated daily and quoted once per year. The payments may be made on a weekly, monthly or bi-annually basis, depending on the finance terms.
Farming business loans may entail set-up fees or those for early repayment. It’s always best to check with your lender for the individual costs involved.
As for the timeframe, farming financing can often be arranged within weeks – however, depending on your lender, this can sometimes take a few months. As with any form of borrowing, farm owners and/or farmers must have all their accounts ready for inspection. In addition, certified accounts from the past 3-5 years, business plans, assets and liabilities details and bank statements may also be required.
Get in touch with the team at Funding Bay to find out your best alternative funding option.
