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Agribusiness line of credit
Stop worrying about seasonal cash flow and get on with the business of running your farm.
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An agribusiness line of credit bridges short-term cash flow problems caused by the seasonal nature of agribusiness.
An agribusiness line of credit is a type of revolving credit line specifically designed for farmers and other agricultural businesses dealing with seasonal fluctuations. A predetermined credit limit is negotiated at the outset, giving farmers easy access to funds during times of poor cash flow, without having to reapply each time. Interest is only charged on the amount drawn down at any time, giving farmers the flexibility to have a pre-approved agribusiness line of credit ready to use should the need arise.
Australia's agribusiness industry
How agribusiness differs from other Australian industries
All industries can experience periods of seasonal demand and be affected by unexpected fluctuations. Businesses involved in agricultural production, like farming and fishery – collectively known as agribusinesses – are significantly more prone to seasonal fluctuations than any other Australian industry.
Agribusinesses are an Australian icon, providing food and agricultural products for local communities and the broader population, with plenty of surplus for export. In fact, around half of Australia's enormous landmass is devoted to agricultural activities, with the vast majority being Australian owned and operated.
Agribusiness is inherently volatile, though, with a disproportionate reliance on ideal weather conditions compared to other Australian industries. Forever at the mercy of the environment, agribusinesses can be struck down by pest outbreaks, bushfires and prolonged weather conditions like droughts, as well as international commodity prices. For this reason, farmers and other agricultural business owners can experience great difficulties meeting debt repayments during periods of poor cash flow, necessitating the introduction of specialised financial products to suit Australia's agribusiness industry.
The need for specialised agribusiness financial products
Agribusiness is undoubtedly a specialised industry and one at the forefront of the Australian economy. A 2004 parliamentary inquiry found a disturbing decline in the number of bank branches in rural and remote areas of Australia, citing 750 bank branch closures in regional areas between 1993 and 2000.
In response, the banking industry stepped up to improve its range of specialised agricultural financial products, with many banks maintaining or increasing their presence in rural areas and offering convenient banking methods including 24-hour phone, online and mobile banking.
In addition, independent lenders have burst onto the scene, filling the gap once created by Australia's big banks and offering a range of financial products and services to agribusinesses that take into account the unique circumstances of the industry and individual businesses alike.
Agribusiness line of credit products are a prime example of a financial product that has evolved to solve unique cash flow problems caused by the seasonal and cyclical nature of agribusiness.
Comparing agribusiness line of credit products
Standard features
Agribusiness line of credit products are offered by a variety of financial institutions, from big banks to smaller, independent lenders and niche lenders solely servicing the agricultural industry. With a wide variety of products available, it is essential that farmers compare their options when choosing any agribusiness banking products including a line of credit.
As a guide, the following standard features could apply to agribusiness line of credit products:
- Security. Credit is typically secured by the business itself and/or the farming property or other residential property, but unsecured lines of credit with lower limits could be offered under certain circumstances.
- Loan amount. Borrow up to 70% of the value of the security if securing the loan by a farming business or property and up to 80% if secured by residential property.
- Interest rates. Interest rates will vary between lenders and as a specialised financial service, farmers can seek to negotiate interest rates and interest payment terms to suit their circumstances. Interest rates tend to be higher than standard business loan interest rates but lower than credit card or overdraft interest rates.
- Loan term. Lines of credit are a form of revolving credit, with no set loan term. Instead, annual reviews may apply.
- Minimum limit. Some lenders will offer a minimum line of credit limit of $10,000, while other lenders will not offer an agribusiness line of credit with a limit less than $20,000 to $50,000.
Other factors to consider when comparing options
When comparing agribusiness loans and line of credit products offered by different lenders, consider the following:
- Fees. Interest rates are always an important consideration when comparing finance options, but it is equally important to be aware of all fees that can apply to the product. Investigate upfront fees such as application fees and loan establishment fees, ongoing fees like account servicing fees, exit fees and early repayment fees.
- Flexibility. Perhaps more so than any other industry, agribusinesses require flexibility with financial products. In addition to seasonal fluctuations, agribusinesses can be vulnerable to unforeseen events like a pest outbreak, uncontrolled bushfires or an ongoing drought. Ask your lender about a reasonable amount of flexibility during difficult times.
- The lender. Business loans for farmers are offered by big banks and independent lenders alike, with advantages and disadvantages of each. Big banks may have the financial backing to see your agricultural business through lean times, but may not have the industry knowledge and expertise to fully understand the nuances of agribusiness. Lenders catering specifically to the farming industry can offer a level of understanding that larger lenders cannot. However, smaller lenders may not have the means to offer infrastructure and convenient banking options like mobile banking and 24-hour assistance.
How lenders will consider your application
When processing an application for an agribusiness line of credit, lenders will primarily consider your financial situation, including the equity held in any assets offered as security. Lenders may ask to see bank statements and tax returns to assess your financial circumstances and are likely to check your credit history. Some lenders will also request a business plan including cash flow forecasting to determine the future serviceability of the loan.
Pictures: Shutterstock
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