Down on the farm interest rates are now linked to your balance sheet results!
It has become clear that banks are now completing a risk assessment on every farming business. I have identified the following four points as being key issues the banks consider :
The other factor in all this is that the Reserve Bank now requires your Bank to hold money on deposit against every loan.
For example, if you have a "risky" loan of say $1,000,000 the bank may have to hold $100,000 on deposit. If you have a "safe" loan the "holding" may only be $50,000.
It has become clear that banks are now completing a risk assessment on every farming business. I have identified the following four points as being key issues the banks consider :
1. Analysis of your Annual accounts profit and loss statements, for the last three years.
- Losses will mean a higher interest rate.
- Moving from a loss to a profit will result in an improved interest rate.
- Large loans no longer attract a low interest rate, in fact large loans are perceived to have more risk and may be priced accordingly.
- Historical losses will take a while to drop off.
2. Debt/Asset ratio
- If your debt equals your asset value the rate is going to be higher.
- If debt is 20% of your asset, the rate will go down.
3. Risk
- Does the farm flood?
- Are there seasonal droughts?
- Are you reliant on a lot of bought-in feed?
- Is it a high cost/low margin farming business?
4. Personal Factor
- Can you do the business, manage the money and the property?
- Are there adequate checks, balances and recordings going on?
- Are personal drawings realistic and under control and are actual vs budget being adhered to and copies sent to your bank.
| 90 day bill rate say | 2.60% | ||
| Cost to raise the cash say | 1% | ||
| Bank's margin - to run the bank, profit, and risk say | 1.50% | ||
| Base cost of money | 5.10% | ||
| Then the bank assesses the "risk" margin | |||
| Low risk interest rate | 0.90% | 6.00% | |
| High risk interest rate | 4% | 9.10% |
The other factor in all this is that the Reserve Bank now requires your Bank to hold money on deposit against every loan.
For example, if you have a "risky" loan of say $1,000,000 the bank may have to hold $100,000 on deposit. If you have a "safe" loan the "holding" may only be $50,000.
Summary
- Every business is now risk assessed with the interest rate priced according to that perceived risk. The whole banking business has changed for the better.
- It is a good thing because it is ensuring the Banks are taking care and covering themselves for the untoward.
- It also allows us to go into the bank and ask what we need to do to improve our rating and subsequently our interest rate.
- Finally, it will make us focus on profitability, and running a sustainable business rather than asset building and posting losses.
