Need more cash?


Question: what is the only input into a farming business that is frequently used before it is purchased?


Answer: Overdraft borrowing, when it goes over the limit without prior agreement.


Pat Tomlinson, Exeter


What other input do you assume is available and ready for use without even talking to the salesman?


Borrowing before a formal facility is agreed is an increasingly dangerous tactic for any farm. Gone are the days when bank managers would almost automatically allow a certain tolerance over the agreed limit – either because they have had that authority removed from them, or the decisions are now taken by computers. The onus is on the business to not issue payments that will exceed the overdraft limit and it is safer to assume that the default response from the bank will be to return such payments unpaid; the bank is under no obligation whatsoever to make payments above the overdraft limit.


Cashflow on most farms is going to be tight over the next six months at least – be it because of falling milk yields, extra feed costs, lower lamb prices and higher tax bills as well as the conventional spring seed, fertilizer and spray costs. So how and when is the best way to approach your bank to make sure the business has all the cash available that it needs?


The “when” bit is easy – as soon as possible BEFORE the extra cash is needed; but not until you have collated the necessary information for a credible request to be made. It is essential to present requests “right and complete first time” these days, rather than piecemeal – if the latter, the bank will find it harder to say “yes” and a “no” decision is very hard to overturn, no matter how good the subsequent information is.


There are three fundamental questions that the bank will need answering:


How much extra cash is needed?


This should be calculated (not estimated) and presented on a monthly cashflow forecast, based on pessimism in terms of timing of income and payments. A contingency should be built into the request so that this is the only request for extra funding, not the first of several as each forecast proves to have been too optimistic.


Why is the extra cash needed?


There are good and bad reasons for more borrowing. Is it for increased working capital requirements because costs have increased and/or income has fallen; or is it really to fund losses? If the latter, are these losses one- off because of the 2012 weather for example, or are they symptomatic of more fundamental problems in the business – in which case the bank will need more information on how such problems are going to be addressed. Profitable businesses also frequently need more cash, especially if they are expanding and hence linking the profit and cashflow of any business in budgets is vitally important to understand and then explain to the bank whether it is a good or bad reason for more cash being needed.


When and how will the extra borrowing be repaid?


Not an unreasonable question! The cashflow forecast will again show this and it should cover as long a period as necessary to show how and when the borrowing will reduce. This may be from the 2013 harvest sales, 2013 Single Farm Payment or improving milk sales once the impact of 2012’s poor forage etc. is “out of the system” and/or the cows calve again.


The important bit from the bank is achieving the right decision – after all “cash is king” and without it, the business cannot operate. Once the bank has said “yes”, then the costs of the extra borrowing can be agreed – and the cost of the borrowing is far less important than the availability of it. It’s a bit like nitrogen – (almost) no matter what the cost, it is still worth using it; the only difference is that instead of a better crop yield, the borrowing gives the business the ability to continue trading.


So if you are worried about the business needing a higher overdraft, the sooner you approach the bank and the more comprehensive, well thought through the information you provide, the better chance you will have of securing the extra cash you need, as well as of course, your peace of mind. Thankfully banks have all come out with friendly, generic statements of support and understanding of the increased cash requirements for farmers, but it would be dangerous to count on such simplistic headlines being translated in every case and to every extent required by individual farms.


As ever, the Old Mill team is very happy to help out in presenting requests to the bank, in a format that has the best chance of success – we are proud of our track record of securing finance for clients in a whole range of circumstances.


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