Do not use the new low-cost loans for struggling farms to
Economic view
THE downturn in farm profitability along with significant cashflow issues across all farming sectors has been well highlighted in recent months.
The recent budget, through various means, tried to help with these problems. One area targeted by the budget was the access to low-cost funds for business.
While this is of huge benefit to the sector, it will only be valuable if used for the right reasons. Low-cost funds should not be used to disguise other fundamental profitability issues within the business.
One of the main pro-comments about the new loans is that they will replace other high-interest credit, for example merchant and/or bank. However, if a farm is struggling with making interest payments on capital loans or merchant credit, is a lower interest loan the long-term answer to the business cashflow problems?
Will in fact more borrowings increase the cash-flow problems and effectively cover over more fundamental cash-flow/ profitability issues in the business?
While the loan is of massive benefit in the short term to the farm — a vital and necessary injection of cash — it could have long-term profitability issues for the business as the farmer may not be in a position to repay the money in the years to come.
If a business is in this situation it must look at its own cost base and earning potential as the business will need to raise additional funds to re-pay this loan.
Farmers must not ignore the most basic principles of borrowing money — it has to be paid back.
All borrowings — short, medium and long-term — should therefore be viewed in the same manner; are the borrowed funds going to make a return on investments (ROI); are these funds going to make the business more profitable and therefore allow the business to repay the money (plus interest) along with making an additional contribution to the business profits?
If the answer is NO to these questions, should you be really borrowing the money or should you be targeting the borrowings at an investment that will make a greater return?
Ultimately when borrowing money it will come down to this simple fact — can you afford to make the monthly/yearly repayments? In bank circles they call this ‘repayment capacity’.
While the ability to repay money might not be there every year (for example in 2009, 2013 and again 2016), it has to be there in the majority of years. Options like interest-only don’t last forever; at some stage capital repayments must be made to the lender.
As stated above, access to low-cost credit is going to be of huge benefit to the farming sector, but only if used for the right reasons. If the underlying farm is profitable at a reasonable commodity
ACCESS TO LOW-COST CREDIT IS GOING TO BE OF HUGE BENEFIT TO THE SECTOR — BUT ONLY IF USED FOR THE RIGHT REASONS