Friday, March 29, 2024

PULPIT: Cut the cost of borrowing money

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Interest rates are not set in stone. Farmers can help themselves by following some straightforward rules. ANZ senior relationship manager in Palmerston North James Lindsay has had many years working in the agricultural sector. He knows what banks look at when setting agri interest rates and gives farmers some tips on how to get a better interest rate.
Reading Time: 2 minutes

One of the most common questions agricultural bankers face from farmers is about how they can get a better interest rate on their borrowing.

All banks grade the risk presented by their commercial and agricultural clients – and the lower the risk grade the sharper the client’s interest rate is likely to be.

Strong performing clients producing profits and keeping the bank informed tend to have better risk grades and hence lower interest rates than those who ignore their bank, make repeated losses and regularly exceed their overdraft limits.

To improve their risk grade and potentially improve their interest rate, famers should treat their farm as a business.

They should forward plan, budget and monitor, farm for a profit and keep their bank informed.

Here are some simple steps:

Farmers should develop a plan based on what they want to happen during the season. What expenditure or development would they like to do? A longer-term plan for five to 10 years might be worthwhile as well.

At the start of every season farmers should complete a budget and cashflow forecast so they have an understanding of what their overdraft needs will be into the season.

Monitor progress during the course of the season to see how the business is tracking or make changes as the season changes.

Share the plan and budget with key advisers – banker, accountant and trustees. Who knows, their input into the plan and budget might help the business achieve its goals faster.

To improve their risk grade and potentially improve their interest rate, famers should treat their farm as a business.

While farmers might gain input from advisers when formulating plans, it’s important to remember they own the business and are accountable for it.

Other things farmers can do to improve interest rates are:

  • Have a clear picture of their overdraft needs. Stick to it and if it changes from the original forecast, arrange a higher limit with the bank. No one likes surprises.
  • Get accounts to the accountant soon after balance date and ask for them to be completed soon. Bankers like seeing sets of accounts soon after balance date.
  • Look critically at the farm and plan for a profit. Businesses that are making profits are moving ahead. It’s also a good feeling to have grown and improved the financial position each year. Profitable businesses are better placed to make that next big move and buy the neighbouring block.
  • Ask for feedback – bankers are only too happy to benchmark results against district averages.

If farmers do all this work, will they get a better interest rate?

Probably yes.

Not only will this be a win but farmers will have a better understanding of their businesses and how they are best placed to grow.

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