Restructure loans to ease cash flow, says rural accountant

Farm businesses facing cash flow problems should consider restructuring existing loan agreements as a way of easing current financial pressures, according to rural accountants, Old Mill.

Pointing out that cash flow difficulties typically present the greatest challenge for businesses, Old Mill director, Mike Butler, has urged farmers to plan ahead to avoid potential pinch points, especially during the current downturn.

“There is a fundamental difference between reduced profitability and cash flow pressure,” he said, adding that businesses only struggle for one reason, namely running out of cash, a problem than can even hit profit-making ventures.

“One area where a lot of businesses are exposing themselves to unnecessary cash pressure is where previous lending arrangements have been structured in such a way that the debt is being repaid too quickly.”

Citing the example of a business borrowing, say, £500,000 to buy land during a time of reasonably strong profits, Mr Butler (pictured above) said the farmer in question may have decided to repay the debt over a period of 10 years, rather than the more usual 25 years.

However, now that times are less good, rather than worry about where to find the cash needed to pay essential bills today, the farmer should restructure the loan, spreading the payments over a longer period.

“Based on an interest rate of 1.75% over the Bank of England base rate (currently 0.5%), moving from a 10-year loan to 25 years would slash monthly repayments from £4,700 to £2,197,” he said. “Of course, the overall outlay and exposure to potential changes in interest rates will be greater, but provided loans are structured with in-built flexibility, borrowers may choose to repay larger amounts when times are good, giving them a buffer to ease off the debt servicing payments if trading conditions return to more challenging levels.”

He also said that, provided such re-arrangements are born out of a need to correct what was probably an inappropriate lend in the first place, banks should have no objection to restructuring.

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