Consequences of bad borrowing

Many borrowers place absolute trust in their lender to crunch the numbers and lend for the benefit of the borrowers.  The consequences can be dire and end up with the banker owning the farm asset instead of the farmer.

Bad Borrowing

Banks can lend based on the borrowers’ assets rather than the profitability of their farm. Poor profits will then enable loan repayments to eat into the farm or business asset. It generally follows that the borrower passively signs the farm to the banker without knowing. This can come as a surprise to the farmer when suddenly one day the banker is at the farm gate planning its sale. “Why was I not told?” is the usual response. “It’s in the contract” says the banker.  Usually in fine print on page 10 + The consequences are a fire sale with the bank recovering its money + interest while the borrower is left the remnants if any with nothing to show for the hard work over the life of the loan.

Here are some tips to keep in mind when financing your farm or business.

Make sure you run the loan offer past a specialist loan consultant, accountant or lawyer to ensure the terms are right for your operation that accommodates seasonal fluctuations. Make sure you do the math to ensure your existing financials and cashflow can cover the loan commitments required of you plus some. Provide accurate information that paints a true picture of the operation. Be conservative with any forecasts and provide as many assumptions as possible. If you do not agree with any terms of the offer, speak to your lender to alter it to suit your needs. Always keep in touch with your lender, in particular reporting in good times as much as in bad. Have a plan for when disaster strikes. Will you be better off in the end? Does the lender have a banking license and has it signed up to the Banking code of conduct. Negotiate a good rate of interest and term of the loan. Negotiate on how you want the loan to be secured and assess and acknowledge the risk.

Decide on which side of the fence you want to be:

Pay careful attention to the security being offered and only mortgage what you can afford to lose. Pay of your loan as quickly as possible rather than making the farm look nice.  That will stand you good when you need to refinance in the future. The best way to farm is debt free!