WITH interest rates being at historical lows, and agriculture ticking along pretty well, this is a good a time to get your financial house in order.
Significant annual savings are in the offing for those that spend the time putting together a compelling proposal.
Extracting the best deal is not a right however, and some work and negotiation will be required to arrive at a mutually-agreeable position. Having the relevant information at your fingertips is the first step.
One crucial piece of information is up-to-date, accountant-prepared financials. It is prudent business management to have your financials completed by December 31 each year.
This doesn't mean you necessarily need to lodge your income tax returns, as lodgement date is normally a strategic decision that can trigger tax obligations.
Your accountant will normally be quite happy to prepare financials earlier, this just means both parties have to be organised.
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Another relevant bit of information is an updated budget, which considers "what if" scenarios. This should comprise of your business plan, succession planning, a recent comprehensive statement of position, and anything else that is relevant.
From all of this data, it is not then difficult to calculate the key ratios the bank is looking for. These consist of a loan-to-value ratio, equity percentage, interest cover, and finance cover (this incorporates principal and interest).
All banks "risk grade" customers; they all do this a bit differently, but essentially, it measures a composite of equity and the ability to service loans.
I have seen on numerous occasions, where providing updated information has lowered the risk grading. This improves the rate offered to the customer, and also helps the bank's internal capital metrics. That is, it doesn't diminish the bank's position - a classic win/win.
Obtaining an updated valuation can also be of use. If the agribusiness owner orders the valuation, they control the document, and not the bank. This can be a useful negotiating tool, and can have other uses, particularly for the accountant, if they are looking to put a cost base on property for CGT purposes etc.
An updated valuation may also mean some property can be released as security, as it is not required to fully-secure borrowings.
Additionally, a new valuation can also be of use for succession planning purposes. For example, unencumbered land could be sold off, or borrowed against to fund other projects, or to assist other family members.
While gathering up all the relevant information will assist with interest rate negotiations, there are other flow-on benefits, such as ensuring you have the correct finance mix, and adequate facilities to assist with business growth.
With any negotiation, if you know what the other side is looking for, you can assist them to see your point of view. Providing a full suite of information is an excellent start.
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