Farmers Beware of debt traps out there!

There are enough challenges in farming without having to avoid debt traps. Most farmers cannot believe that bankers would deliberately walk them into a debt trap so that they would be stuck there paying interest until the farm was sold or repossessed. The big banks are so happy about their multi-billion dollar profits. They enable them to pay their executives multi-million dollar salaries. They want more of the same. It is just a game to them but it is no fun when the multi-generational farm gets sold up by the bank.  The farmer then spends sleepless nights worrying about it. Once locked into an impossible loan it is hard to get debt relief. Hard, not impossible!

Warning signs

There are warning signs.

1. When the current loan (secured by farm mortgage) is half repaid the bank calls. It starts telling you about all the things you could do by just borrowing a bit more. It looks so easy. Borrowing IS the easy bit. It’s the paying it back that is hard.
2. The bank offers you a loan. The document tells you all about how many dollars you will receive in the loan. It tells you and nothing about how many dollars your will be paying. The latter is all a jumble of months and percentages.
3. You are offered a long-term mortgage loan. It is interest-only for a good number of years, so it looks as though it is ultra-easy to repay. It will be a lot harder later.
4. The bank suggests that it can help you with a generous “Succession Plan”. "It will give you more money than you have ever dreamed of." What’s the catch?
5. You have just repaid the 20 year farm mortgage. A bank rep tells you not to worry about picking up the title deeds or paperwork. "They will be safest in security of the bank."

Let’s look at what can happen later on.

1. The bank earns money by charging interest. As you become happier to see the bank debt falling, the bank gets more worried about its falling interest income. It therefore is desperate to encourage you to borrow more, knowing that it is well covered by the farm mortgage. Debt free farming restores the farm lifestyle. If you borrow more you increase the stress of having to work sunup to sundown. Why fund the bank profits and risk foreclosure if things go wrong? It is like keeping on feeding the pigs in the trap to keep them happy.
2. Farmers would eye-ball a bull or cow for ages before buying it. The same farmers sign a farm mortgage for 100 times as much, without studying the details in any significant way. All they want to know is that they will be given money by the bank to do what they want to do. All borrowers should work through their loan documentation. Start  with the Farm Financial Consultant and then with their lawyer.
3. Interest-only loans are a real trap. The repayments look so easy in the first year that it is common to look no further. Interest remains higher longer than it otherwise would. Down the track there is a very unpleasant surprise waiting.  The actual loan itself has to be repaid along with the interest. If that happens in a bad season it can spell ongoing disaster.
4. The worst possible succession plan is one that leaves the younger generation with a hunk of bank debt. It often takes a few years for their new ideas to produce a profit and in that time extra debt can be fatal. It is best to leave the farm unencumbered. We all know how hard it is to manage debt in bad seasons and watch it grow. There are superb succession plans that can easily and inexpensively be put into place. Such plans pass on the farm in the way that works well for both generations. It is better to talk to a professional about it before talking to the kids. Once it is opened up in a family meeting, opportunities to think before speaking sometimes disappear.
5. “No need to pick up the deed” the banker says “we’ll keep it safe for you.” It is important to keep it safe, but! Along with the title deed or substitute, the bank also holds a mortgage. That is a ticking time bomb. The bank is not a safe place. The farm is vulnerable as long as the bank holds the mortgage. Make sure to get mortgage discharge document, even if it costs you.

First Greg Bloomfield consulted farmers from a nationally affiliated Chartered Accountancy practice in Sydney. Next he ran sheep in the centre of NSW and Cattle in the Southern Tablelands. He Chaired the largest branch in NSWF and founded a political empowerment service. He saw another need. So he switched to bank debt consultancy and toured the state. That worked so well that the demand from farmers throughout Australia just grew and grew. He moved from consulting by fax and phone  to  online and phone. Fortunately the political empowerment service enabled him to report dishonest bankers to  Parliament. Profitable Farming The financial perils of farming are far greater than for other business ventures. Changing  weather and the changing nature of both livestock and crops always threatens. Farmers can now use software to pinpoint important changes and model the farm finances under changing circumstances. Unfortunately most accountants are too busy to do that. Generally farm financial data is primarily used to meet taxation liabilities and relax the bank. Every farm should have a  simplified financial control system to help them make more money. Greg constantly works with  farm clients to focus on profitable farming. If you are going to work hard all day it might just as well make money for you as well as for your suppliers. When farming is more profitable the lifestyle is more enjoyable and the family is far happier. The path to that happiness is to clear the debts like you clear the noxious weeds - ASAP.