Aussie Debt Solutions

If you are interested in turning farm debt into farm profit and how best to do it, check out this 8th hint on the GBAC site

Watch and record for future reference anything the bank does that you think is not in your interest  or is unfair. When offering home loans banks are usually very helpful. That is often the high point in the relationship. After that, once it has security rights to sell your property if you do not obey loan terms, the lender is in the box seat.

It is not unusual for conflicts to arise. Risk management in banks is no longer handled at local branches and in fact may be handled Interstate or overseas. Therefore the person in charge of collecting regular payments, if in fact there is any person involved rather than a computer, may not have any idea of changed circumstances affecting your farm. A computer certainly will not!

Even if they are in your capital city they still may have no idea of weather events, government policy or commodity price changes that could affect your ability to manage the debt. When GBAC advisory handles loan applications for clients we try to ensure that in the loan document the farmer has covered most eventualities.

If serious problems or differences of opinion arise between you and the bank and you want an advocate like GBAC to arrange a favourable settlement with the bank for you so that you can refinance your loan elsewhere, we need to know all that the bank has done wrong. Then it will talk turkey. What often happens is that the bank has detailed records of everything the borrower and the bank have done throughout the loan, whilst the borrower has no records at all.

Keep a loan diary from the time you accept the loan to the time you clear it and claim your title deeds back.

Make extra loan repayments whenever you can. Sometimes you may be able to make double or triple regular repayments for a few good years.

To do that, first when signing up for a loan, make sure you have the ability to make early repayments without penalty.

In a low interest environment it is not that you will save a heap of interest as would be the case when interest rates are high, but that you will clear your debt and have clear title to your farm sooner. That dramatically reduces the risk of foreclosure and you losing the farm. Having your own title deeds safely in a deed box at home is a good thing.

Bank charges on loans also eat up farm profits just as interest does. But nothing eats up farm profits like the worry of dealing with a defaulting loan with the bank constantly on your back.

With interest rates around 5% or less, it is good to remember that not so long ago they rose to 24%.

Once debt is cleared, it is possible to concentrate on farming and enjoying life. As long as you have debt there is potential for trouble when seasons go bad or prices do the same. It was Solomon who wrote “The borrower becomes the lender’s slave”. In my GBAC Advisory consultancy I have seen many farmers working day and night to make more profit for the bank than for themselves.

Coming up are four more hints on turning farm debt into farm profit and they are the most spectacular of all.

Many people put a lot of time and effort into applying for and securing loans. Then they receive an offer, hopefully a few; check the offer and loan documents thoroughly and sign up. After that they hold out the bucket for the money to drop into. Once that happen the vast majority forget about the loan, depending on permanent payment arrangements to attend to payments.

As long as it all goes well, it all goes well. If loan repayments are met on time all the time there is really no problem, but the borrower may well be flying blind. They may depend entirely on bank statements to reveal how the loan is going.

One thing the Royal Commission did show is that some of the most respected lenders sometimes cheat borrowers. If your aim is to make profits out of your loan or to gain an asset that will increase in value or contribute extra profits, it will be wise for you to maintain your own records of how the loan is reducing and compare that with bank statements. Carefully record the interest and charges that increase your debt and the repayments that reduce it. Then compare them to the bank statements when they arrive.

It is easy to set up a spread sheet with 5 columns – 1.date, 2.opening balance, 3.interest and charges, 4.repayments, 5.closing balance.

Each line down the page in the first column would be one month in the loan term column.
Columns  2+3-4=5.

One of the most important factors to understand is the balance outstanding at any one time.

If anything goes wrong with the loan or your relationship with the lender, it will be important for you to have a record of the life of the loan as well as the lender having it. The thug like debt collector who is charged with recovering a debt that is in default, is a very different person to the smiling lender who approved the loan application.

People in trouble with bank loans often come to my firm with a big debt problem but few records of what has transpired. Some do not even have a copy of their loan contract. When we sit down for serious negotiations with a lender, the lender will not readily produce documents that prove it did something wrong or even illegal. When the borrower has a good record it is much easier to pinpoint faults on the part of the lender.

This sort of record should take only about 15 minutes a month to maintain. If for any reason you decide to refinance elsewhere that record can easily demonstrate your ability to meet loan terms if you happen to not have bank statement to do so.

Your record may well provide you with a better indication of what the loan is actually costing you that can quickly be compared with your profits each month as compared to last year and budget.

A loan can be a good profit-spinner but it can also be a loss-maker so records are important. When I changed GBAC from a Chartered Accountancy practice to a debt solutions consultancy for businesses and farms, I saw how easy it was for borrowers to get into strife. Having run my own businesses and farms as well as consulting, I could understand the constant pressures under which business and farm owners operate. Businesses always face competition from other businesses along with government regulation whereas farmers have to contend with unpredictable weather & prices.

Keep good records and think often about your debt and how fast it is falling. If you need advice call a consultant.

Once your loan has been received, monitor every change in the debt yourself. You need to know at least as early as the bank does, what is happening with your debt. Otherwise you can find yourself paying penalty interest rates instead of what you thought you were paying. It also means you know how much you would need to refinance if the relationship with your lender collapsed.

Prepare an excel spreadsheet to record repayments and residual debt levels.

Columns could be:

Transaction date; opening balance; add interest charged since last entry; less repayment made since last entry;  new closing balance ( becomes opening balance for next transaction date).

Transactions would be entered whenever repayments are made – weekly, fortnightly, monthly, quarterly, annually Etc

By doing that you will always know how much debt is left, what interest is being charged and whether payments are up to date. That is a lot better than you relying on the bank to record the details correctly and thus the bank being the only one to know how your loan is progressing.

If problems arise, contact the bank quickly and explain what caused them. It is very easy for a flood or fire to bring cashflow to a halt or even drain bank balances.

Ask for an extension of time. Even when you are given an extension, if you use it many banks will still treat that as a default that they can use against you later. It is not a problem but it is good for you to know.

If there are serious difficulties with repayments or friction with the bank, call in a consultant like GBAC to manage the situation for you. Consultants do that all the time and are therefore more familiar with what will be acceptable to the bank and what other options you have, like refinance with another bank.

Major problems with the bank can cost a heap of money and destroy the profitability of your loan. They can also take up masses of time again diverting borrowers from profit-making. By delivering you extra profits as well as a capital asset, your debt will be making all the effort worthwhile.

Any borrower not earning profits is probably making losses. Don’t let anyone tell you “they are just paper losses”. There is no such thing. That I know after  years of consulting and accounting.

Seriously helpful hints follow up to No 10.

Hint No 4 – read and understand every word in your loan document

I am sorry for the week long gap in posting. I have been on the farm working flat out. It is hard to believe that fenced creek crossings that survived for 30 years have been knocked out and reinstated 4 times in the past 12 months or less.

My last 4 hints ( Nos 7,8, 9 & 10) are the most interesting but hint number 4 is very important.

Read and understand every word in your loan document. Lenders count on the fact that borrowers do not know the law or speak legalese and so rarely read the loan document fully. Even when they take it to a lawyer the lawyer often just peruses the contract or Letter of Offer and as long as it does not depart from the usual, advises the borrower that it is okay to sign. Never, under any circumstances use the same lawyer as the lender. A lawyer cannot serve the lender and you. The lender’s rights will always take preference.

Many lenders take the opportunity provided by expanding or slightly changing a loan facility, to insert clauses into it which favour the lender and disadvantage the borrower.  They count on the borrower assuming that nothing has changed. You will know that “assume” makes an ass out of “u” and “me”

In one revised 15 year loan contract I looked at, the bank had inserted (less than a year after the loan was originally offered to the borrower) a new clause requiring the borrower to sell the farm over which the loan was secured within 12 months and pay the proceeds to the bank. No mention of this change had been made to the borrower who was required to sign it on the farm when presented to him without legal advice.

Before we send a client to their lawyer for legal advice, we work through the contract or LOO with the borrower explaining the monetary impact of those clauses that require understanding rather than legal knowledge. Where the borrower does not completely understand a clause we mark it with a pencil cross for the lawyer to explain it fully.  We suggest that if the borrower is not happy with a particular clause, he or she crosses it out, initials the alteration and presents it to the bank saying they would not accept that term. In most cases if their reasoning is fair the lender will accept it.

The benefit of the loan application system which gets 2 or 3 lenders willing to lend, is that if the preferred lender will not accept the borrower’s deletion, one of the other lenders can be asked if they would. In such circumstances it is good to let the original lender know that another lender is being approached. Competition for the ultra-profitable lending business can be very persuasive.

Always check with a loan consultant for a Loan Impact Assessment so that you know what to expect  during the loan term. Then have a good lawyer who is not acting for the bank and preferably never does, advise you on all the legal implications.

Do not believe the fairy story that the bank will not sell you up if you default. I have sat with bankers telling a couple with young children that the bank would never force them out of their home if they got into trouble and then seen that very bank do just that. It is not that the lending officer is a liar. He or she believes the bank will treat borrowers fairly. But the person who forecloses and throws the family onto the street is a different person with a different perspective on life. Don’t be fooled and find yourself with nowhere to go like this goanna on a hot tin roof.

I warned farmers about this in an article I wrote about 30 years ago in The Hereford Quarterly, but people in the bush have been raised to trust their bank manager. It used to be a good idea, before the banks were deregulated by politicians and realised that they could make super profits by entrapping borrowers, charging penalty interest rates then selling them up after a decade or so of trying to service an impossible loan.  It was that de-regulation that prompted me to move my GBAC Chartered Accountancy practice from primarily business profitability and tax planning into a bank loan problem solving consultancy.

When I was a young trainee Chartered Accountant of 19 we had no money in my family, widowed mother and twin younger sisters. On the way to an audit job I discussed with my senior the prospects of Mum or me borrowing some money from the bank . I’ve always remembered his words -“You should never borrow for consumables. Only borrow for capital expenditure on some asset that will last for long time like a fridge, car or furniture.” We may have been considering a washing machine, radiogram or to have the house painted. I painted the house myself anyway.

Whatever it was, I absorbed the message very well and I have never borrowed money for any reason other than to buy and asset. It is generally important not to borrow money to cover farm losses. Better to stop spending and stop the losses.

Decades later I hunted around for a property on which to run sheep and found one in the middle of NSW for which we were able to pay cash. We loved it. Wool prices were good and so we made reasonable profits there.

But I wanted to protect against drought so I built a couple of smaller dams and then decided on a 20,000 yard dam in a large paddock. I learned about “spreader banks” to catch the water and spread it over the paddocks. Great idea, so I borrowed from the bank and spent a good bit of money on it and the dams. In the end the spreader banks did not do what we hoped and sheep would have done as well out of a 5,000 yard dam there instead of the 20,000 yard .

When I subsequently purchased beef cattle property originally settled by my great-grandfather I became enthused about cell grazing and fenced one valley into cells. Because I spent half my life on the road driving around NSW consulting farmers who were in trouble with banks and getting a good hunk of their debts written off, the cell grazing could not really be properly managed. For all the years it operated I do not believe that we ran one extra cow in those paddocks. It was not the fault of the cell grazing system.

I chalked them up to experience. They were not good investments because I had failed to do my homework and see what would work for me in my circumstances.

Those two were about my only bad capital purchases. A visitor one day remarked that he liked the farm, adding “but the only problem is that the fences are all the same age – old.” I replied that I ran the farm to earn income, not to make it look good. As I grew older and we sold off blocks to keep the place to a size we could manage on our own, I confirmed that new fences would not have run more stock or increased the sale value.

But if you are fencing or building sheds or even buying the block next door, on a bank loan, do the sums. Work out what it will cost and how long before you get your loan paid off out of the extra profit you earn. If you are not good at figures, sit opposite your accountant for half an hour and you should have the answer. If not call me at GBAC and I might be able to tell you over the phone for free.

 

Don’t borrow for day-to-day running costs

For farm debt to produce a profit it is generally better to fund operational expenditure out of cash in the bank. It is not good to borrow to cover farm operational expenses except in the rarest of circumstances.

If it becomes necessary to borrow to cover such expense as fuel for grain producers or feed for stock, there is a big risk that a crop failure or a stock price fall may result in residual debt. That then has to be cleared from a future season. All it takes  to turn anticipated profits into losses is a bad season, a fall in prices or some other calamity. Frequently even the cost of substantial refencing is not recovered and in many cases it is better to just repair the old fences.

I have spent plenty of money on running costs that I thought would be profitable only to find when I monitored results that the anticipated profit did not eventuate. The consequences of a mistake can be much greater when debt is involved. Sometimes we borrow to make operations easier and faster or become more productive. Then we have more time to spare and end up spending more money on whatever we do to fill in that time.

For most of my farming career I have felt that the less I borrowed the more money I made. We farmers always want to be busy and being busy often involves spending money. Frankly there is considerable merit, once the farm is working well and producing recurring profits, in spending a bit more time sitting on the verandah and enjoying the view. It is seeking to make a farm more profitable that often directs much of the profit to the moneylender.

Next hint will be about borrowing for capital expenditure.

Note: everyone’s circumstances are different. These are just general hints. To check what is good for you please consult your accountant or a GBAC consultant

Get the right loan for you at the time!

Borrowers have a tendency to stick with the bank they know. Up to 1987 that was a good idea. The bank manager knew each customer and was as much a financial adviser as anything. The manager would rarely lend any customer into trouble, was not paid very much, but was greatly respected in the community. Banks were regulated in their behaviour by government so that they served Australia and Australians. De-regulation by politicians in the Hawke/Keating era changed all that.

Profit gradually dominated bank behaviour from then on and has led to a stratospheric rise in bank profits with bank CEOs being paid up to $1 million a month. It has also been catastrophic for many bank customers.  Every dollar of CEO pay and bank profit is a dollar lost by a bank customer. The Royal Commission discovered the extent to which banks have deliberately lied, cheated, abused and defrauded their loyal customers.

Hint number 1 for turning debt into profit is to get the right loan in the first place. To do that a borrower can invite every possible bank to offer their best loan. In 1987 I invented the Moneygram system for making that easy and we have refined it since. Most farmers look for quality stock, hay or seed before price, but do not apply the same rigour to loans. It is only later on that many discover flaws in their loan deal. It is each term in the loan contract, not just the rate of interest, that is important. Many lawyers do not know what to look for in that respect. It takes a knowledge of accounting and farming to to that.

One GBAC client was given a 15 year loan to refinance a debt secured by a mortgage over two of his farm properties. When the government caused a crisis 6 months later and livestock could not be sold to cover planned loan repayments and farm expenses, the bank “kindly” gave him a 10% increase in the loan, but insisted on a new contract for the whole amount combining the old and new loan. Without drawing it to the borrower’s attention, the bank slipped into the middle of the contract a clause requiring one of the properties to be sold within 12 months.

Even if they had seen that clause the customer could not have refused the revised contract without defaulting given the prevailing circumstances. The loan money had been spent. Nobody would have refinanced at that time in that climate of financial fear on farms. The bank would take the proceeds to clear the mortgage on that block.

What a surprise for the farmer to discover that he had inadvertently agreed to sell his largest property, which would make the remaining debt very difficult to service!!

We have seen different banks all around Australia treat customers like that as profit became far more important than the lives of the borrowers and their families. Make sure the contract you sign gives you the best possible loan.

The next hint, No 2 will be about what should and should not be financed by debt.

Farmers all over Australia carry substantial debt along with their livestock and crops. Often it comes from buying the farm from the family. We tend to find that inter-generational transfer of farming done without bank involvement works best. Banks make huge profits by lending farmers money at substantial interest rates and large charges to buy farms. That money is then paid back into  the banking system by the seller at a far lower interest rate and without the extra charges that go with a loan. That yields bigger profits than your best season’s crop.

Decades ago when moving from sheep to cattle and buying my own place for a lot more money than I had, I arranged a 20 year interest-free loan to purchase a family farm from a relative. The trade-off was that he could continue to live in the main homestead, while we would live in a workman’s cottage, for as long as he liked. He enjoyed that for 7 years and we enjoyed his company experience and advice. Then he moved out and we had a superb homestead and the farm to ourselves. In 20 years we had paid it off. My Chartered Accountant brain was happy. We built into the loan agreement provision to cope with droughts, floods and other disasters. Every 5 years we had to ensure that a quarter of the debt had been repaid. In between we could defer the odd payment if an unusual event arose. It was a strain to pay it off but it worked well. The thing about family loans in passing down a property is that firstly the older generation does not need a bucket of money all in one go and secondly it cares deeply about the younger generation and will understand any unexpected loan repayment issues far better than any bank.

Many farmers who have used bank finance to buy their farm or add another block, even buy stock, report problems with the bank in hard times. Around Australia we have just suffered devastating bushfires, drought and floods. In 2011 the live trade suspension spelled disaster for many cattle breeders from which they struggled to recover for years. Predatory banks saw an opportunity to load up already indebted farmers with more debt then charged extortionate penalty rates of interest as payments could not be met. Penalty interest made it even more difficult to meet repayments so debt grew and grew so that eventually the bank could sell the farmers up and gift their friendly receivership firms a few hundred thousand dollars in fees paid by the farmers in the process.

Standard practice for many farmers in such a position is to desperately flog the farm in order to meet loan payments and try to ignore threatening letters from the bank. This causes massive stress on them and their families and makes the bank as angry as poking sticks at unfriendly bulls does. Far better is to deal with the underlying problem which is excessive debt aggravated by abnormal circumstances. It was a Rural Counsellor in Dubbo NSW who set me on the right path. One day after referring another of her clients to me she remarked “If he’s got noxious weeds don’t let him treat them. They devalue the property and discourage the bank from foreclosing. Most farmers who have a beef with their bank inflate the value of their property. That just encourages the bank to sell them up. Leave it as run down as possible then negotiate a partial debt write-off and refinance them elsewhere.” That clever lady taught me a lesson that has benefited farmers in every state and territory of Australia whether in farm debt mediation or not. What I then learned from that was that money lenders write off debts just like fruiters throw out the fruit that goes bad and bakers sell off cheap yesterdays stale bread.

So when you have a beef with your bank don’t back off any more than this black bull would do. But be prepared to crack the whip and let the bank know that you, the customer, are in control.  This guy was very friendly from birth, but I never moved him on foot without a whip in my hand. That is a good way to handle your bank too. There are ways to make that easier which I will discuss some other time.

Over the decades I also discovered that when I reported dishonest banks for malpractice to every one of the 225 Members of Federal Parliament, that led a storm in the boardroom, action by authorities or a Royal Commission. None worked well for uncaring bankers sticking pins into troubled farmers. There are plenty of good bankers out there and in my next blog I will talk about getting to them.

Greg Bloomfield
www.gbac.com.au