Do You Need Agricultural Finance?

The implications for British agriculture of the referendum decision on the 23rd of June 2016 to leave the European Union (EU) are not yet at all clear. Some of the issues surrounding the possible impact are considered in a paper by the Centre for Rural Economy at the University of Newcastle.

Although the UK is currently a net importer of food, the changed economic regime might encourage increased importance in local farming production and the expansion of existing agriculture.

Joining the expansion

If this is the case, are you ready and able to expand your own farming business or invest in its current form in order to meet whatever new challenges Brexit may bring?

The answer to that question might depend on the availability of the plant, equipment, machinery, and distributive resources at your disposal. In agricultural circles, these are by no means cheap or economical assets to acquire.

That in turn begs the question of whether you have access to sufficient agricultural finance to invest in the plant and machinery you need.

Agricultural finance

With the help of an independent finance broker specializing in the provision of funding for agriculture, you might want to consider some of the following options:

Business loans

  • traditionally, these have been advanced by the bank with whom you have been doing business – often over a good many years;
  • since the financial crisis of 2008, and given the uncertainty of the economic climate for British agriculture in the years ahead, however, you may find bank loans more difficult to secure – and when and if you do, find that they come with a relatively high rate of interest attached;

Hire purchase

  • an equally traditional route to the purchase of major items such as farm equipment and machinery is hire purchase;
  • once you have put down a deposit – typically around 10% of the purchase price, you may make the purchase on credit by paying equal monthly installments until the full balance is paid;
  • although you have entered a contract to purchase the machinery or equipment, you do not actually own it until the full balance has been paid – and if you default on the repayments, the hire purchase company may repossess the item or items involved;

Finance lease

  • just as the term suggests, this arrangement allows you to lease the machinery or equipment, rather than actually owning it – although you do gain exclusive rights to use them;
  • because you are leasing rather than buying on credit, the monthly lease payments may be lower than you pay on a business loan or hire purchase – although the lease agreement is typically long-term in its coverage of the effective working life of the plant or machinery;
  • at the end of the lease agreement, the equipment or machinery is simply returned to the owner – irrespective of any residual value;
  • your acquisition of a financial lease is typically incorporated into the balance sheet of your accounts;

Operating lease

  • this is an even more straightforward form of leasing agreement – and one that usually appears in the statement of profit and loss of your accounts;
  • it is typically much shorter-term – no more than one to five years – and the plant or machinery is returned to the owners at the end of the agreement;
  • you might then enter a succession of new operating leases to ensure that the machinery you are using is always new or nearly new.

The type of agricultural finance suitable for your own farming business of course depends on your particular, individual needs and requirements, together with any expansion you may be planning.