Look before you leap into a farm loan!
It’s not dumb to check the sum
Before borrowing it pays to obtain independent advice from a loan consultant who can do the sums on the farm loan.
Lenders may not be lending for your benefit, as much as for their own .
Don’t be fooled by the “interest only for a few years” debt trap.
Borrowing $2 million for a farm loan
If you can borrow $2 million over 10 years @ 4.52% how good is that?
Compare it to your after-tax net profit last year.
The interest will be about $90,000 a year.
Principal repayments will be $200,000 a year.
If you earn $500,000 then deduct the $90,000 interest and you will have taxable income of about $400,000.
You will pay, depending on your farm structure, about $160,000 tax, leaving $240,000 after tax.
Deduct the $200,000 principal yearly loan repayment to leave you with $40,000 to live on, save or reinvest in the farm.
If you are earning $500,000 a year net profit, you may not need to borrow $2 million.
Saving for 4 or 5 years would give you your own $2 million to spend interest-free.
Borrowing $5 million for a farm loan
Alternatively If you could borrow $5 million over 10 years @ 4.52% how good would that be?
Compare it to your after-tax net profit last year
The interest will be about $230,000 a year
Principal repayments will be $500,000 a year
If you earn $1,000,000 then deduct the $230,000 interest you will have taxable income of about $770,000.
You will pay, depending on your farm structure, about $330,000 tax, leaving $440,000 after tax.
That will not be enough to pay the $500,000 principal loan repayment so you might have to sell stock or equipment to raise the extra $60,000. There would be no money left to live on
If you are earning $1,000,000 a year net profit, you may not need to borrow $5 million. But if you do it may absorb all of your million dollar profit.
Saving for a few years would give you your own $2 million to spend interest-free.
Warning: Don’t use these figures for yourself
These are just rough figures to illustrate the importance of getting independent advice from someone who can do the sums and help you avoid the debt trap lenders often lay.
Whatever you do, don’t use the above figures to assess your loan. Every farm is different in many ways and so are those who run them. Each needs loans very carefully tailored to their exact situation. Lenders will never do that for a farm borrower. Nor will anybody funded by or associated with the lenders.
That is why so many people consult GBAC
, with its farming and accounting background. Greg Bloomfield, like his grandfather, grandmother, and great-grandfather, has owned farms and run both sheep and cattle. He was also a Fellow of the Institute of Chartered Accountants and a CPA. He headed the largest District Council in NSW Farmers at one stage.
His firm assists farmers all over Australia to get the very best results from their sunup to sundown work of farming in conjunction with the weather, commodity prices, government policies and often predatory lenders. Call Greg on 0428 417 496 to chat about it.