ANZ Senior Relationship Manager James Lindsay recently wrote this opinion piece on what banks look for when setting agri interest rates and how farmers can potentially get a better interest rate.
The full article appeared in the New Zealand Farmers Weekly or you can read the full article here:
One of the most common questions Agri bankers face from farmers is how do they get a better interest rate on their borrowing?
All banks risk grade their commercial and agricultural clients – and the better 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. Forward plan, budget and monitor, farm for a profit and keep your 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 5 – 10 years may be worthwhile as well.
At the start of every season farmers should complete a budget and cash flow 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 may help the business achieve its goals faster?
While farmers may gain input from advisors 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 this 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 them to be completed soon. Bankers like seeing sets of accounts within a 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 the farmer will have a better understanding of their business and how it is best placed to grow.
James Lindsay is a Senior Relationship Manager with ANZ Bank based in Palmerston North. He has had many years working in the Agricultural sector.