Farm Loan Management Solutions for 2023

Using higher profit to reduce debt
The average debt of indebted Australian farms is probably just over $2 million with average farm profit at perhaps a bit under $200,000, up from $100,000 in 2021.

This provides a golden opportunity for farmers to pay down debt before interest rates head higher.

For those farmers carrying past tax losses, the whole of this year’s profit will be available to them. If half of it could be allocated to debt reduction it might help them to clear debt faster. By reducing the interest charged, extra loan repayment accelerates debt repayment.

Farm management
Farmers are highly skilled at stock, pasture and crop management. But for many, that occupies so much of their time and effort from sunup to sundown, that they do not have time for the vital area of financial and debt management. It is not difficult, but it does require skills too. It does not just “happen”. If the farm borrower does not manage a debt, the bank will do so in the way that delivers it the highest profit. If the money is not properly managed on farm then family drawings and loan management can both suffer as a consequence.

Bank De-regulation
We hopefully run our farms to earn income. As a 4th generation farmer born in the city, I ended up in Chartered Accountancy before running Merinos in the centre of NSW and beef cattle in the Southern Tablelands. Being heavily involved in NSW Farmers, I became aware of the devastation that followed bank de-regulation. Since then the banks have had legislation passed to protect them from prosecution and compensating the customers they treat so badly. So I dumped my accounting and tax  practice to focus on helping farmers battle the banks.

I have been staggered at the dishonest bank practices I have encountered all over Australia. No matter what state or territory, farmers have been cheated and defrauded on a huge scale as the Banking Royal Commission revealed. That has not stopped and will not stop. Only borrowers can stop it.

I have never given my sheep, cattle or bank control of my farming enterprise. I don’t imagine many farms want to do that. The problem is that when the seasons don’t go well, workload increases and ability to repay loans can decrease, sometimes causing catastrophe. Then a bank, if allowed, can start exerting more control and extracting more of the farm profit for itself.

Loan management
There are three aspects to loan management.

1 is to earn substantial profit and let the bank see that, so it does not worry about the loan security. Quite a bit of farm profit can be held in the grain silo or in stock born on the place. That usually does not feature in the tax figures but it is worth letting bankers know about it. On my place a calf was valued at $20 for tax, yet the female retained might grow to be worth $4,000. 100 of them would make a $400,000 difference to profits and 1,000 would make a $4 million difference. Yet that profit is only seen when they are sold.

2  is communications with the lender. These are extremely important but often forgotten. Imagine if you have loaned $2m to someone and then you don’t hear from them for 5 years. If a payment is missed, your heart is suddenly in your mouth. Whenever there is a really good result on the farm it will pay to quietly let the bank know about it – a big profit, exceptional prices received, great season. That builds relationships which can pay off handsomely in the next bad season when a repayment holiday is needed. As soon as there are problems that might affect repayments, get in touch with the bank and let them know. Never promise a repayment that you might not make. That is the greatest sin in loan management.

3 is to plot the loan from start to finish. We like to set up a spread sheet with a line for each repayment date and a column each to show the date, last loan balance, interest charged since then, payment made since then and loan balance after the loan repayment has been made. It is then easy to see how the loan is decreasing over the years until it is repaid.

  1. As soon as the loan has been cleared contact the bank and ask for the title deed back and a mortgage discharge. Do not let the bank talk you out of that, because as long as the bank holds your title deeds and a mortgage your property is at risk. It could be lost by something as simple as a guarantee, hackers or bank fraud. Banks love to hold the deed as they can then talk the borrower into another loan to make them money out of farming.

5 Then run debt-free until the next time you need to borrow for a major capital purchase. It is best not to borrow for farm operational costs, particularly on overdraft. A single bad season can send the farm into a debt crisis.

6 The best long term solution as well as storing feed on farm, is to store money away in the bank so that the next time you need money you can use your own instead of borrowing. It is more profitable. Savings also need a serious management plan to accomplish because there are many calls on every dollar received. Careful planning can create large savings as well as meeting all other necessary demands for cash.

But a caution.
Everyone’s situation is different. When you borrow, check with a banking consultant to ensure that you are doing the right thing and will manage the loan to make money for your self and the family, not just for the bank. That consultant needs to know your profits for the past 5 years, your plans for the next 5 and the impact that your annual principal and interest payments will have on your cashflow. Negotiate terms that suit you, not just the bank!

Meanwhile, have a Merry Christmas and may the New Year be a happy and prosperous one.

Greg Bloomfield, GBAC

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