The old cliche about farmers wearing many hats is as true today as it's ever been, and one of the essential tasks facing many farmers is finding the right financing to get the land, tools, equipment and supplies they need.
If you're a farmer looking for a business loan, there are many different financing options available. Let's take a closer look at what those options are and how you can find a loan that matches all your borrowing requirements.
Loan types available to farmers
There are many different loan types available, each of which is designed to meet a specific funding need:
|Loan amount||What is it?||Features|
|Term loan||From $10,000||Allows you to borrow a lump sum and pay it back over a set term.|
- Can be used to purchase property, make capital improvements or build new production facilities
- Fixed and variable interest rates available
- Secured and unsecured loan available, but offering security allows you to access better loan terms and larger amounts
- Many loans feature additional repayment flexibility and a redraw facility
|Line of credit||From $10,000||A revolving line of credit, with a predetermined limit, which you can access whenever you need.|
- Quick and easy access to funds at any time
- Only pay interest on the amount you use
- Can be paid off at your own pace
- Many business lines of credit need to be secured, but unsecured financing may be available to some borrowers
|Overdraft||From $10,000||A revolving line of credit linked to an existing business bank account. It provides quick and easy access to funds when you need to overcome a cash flow shortage.|
- Can only be accessed once you've used all the funds in your account
- Secured or unsecured financing available
- Useful when unexpected expenses arise or you experience a short-term cash flow shortage
- No fixed repayment schedule as long as you stay under the predetermined limit
- Higher interest rates and fees may apply
|Equipment finance||Cost of equipment you need to purchase||Allows you to access the equipment your farm needs without having to pay for it upfront. The asset purchased is typically used as security for the loan and you buy it off the lender in instalments, or lease it for a set period.|
- Several financing options available, including commercial loans, hire purchases, finance leases and novated leases
- Potential tax benefits
- Terms usually range from 1 to 7 years
- Repayment schedules can be tailored to suit your budget
- Allows you to buy the equipment you need to keep your business running
|Livestock finance||From $25,000||Provides the funds you need to buy new livestock, re-establish stock numbers and cover animal health expenses.|
- Livestock used as collateral for the loan
- Can also be used to refinance an existing loan or cover other farm expenses
- Fixed and variable interest available
- Interest is usually capitalised (added to the loan amount and doesn't have to be repaid until you sell or refinance the livestock)
Business loans farmers can compare
Updated October 15th, 2019
What features should farmers look for in a business loan?
There are several important factors you'll need to take into account when searching for the right business loan for your farm, including:
- Affordability. Check the interest rate and all fees that apply to the loan to work out how much it will cost to repay the amount you borrow. Remember to consider the repayment schedule and how much your regular repayment amount will be before you apply.
- Repayment flexibility. Can you make additional repayments towards the loan amount without incurring any extra fees? Some lenders also offer the flexibility of seasonal repayments, allowing you to pay down your loan during the times of the year when your farm experiences the greatest cash flow, so keep an eye out for this option if required.
- Redraw facility. If you can make additional repayments ahead of the loan schedule, will you also be allowed to access those funds through a redraw facility? This can help you overcome any short-term cash flow shortages that may arise.
- Offset account. Does the loan come with an offset account which you can use to reduce the interest payable on the money you borrow? This can help reduce the total cost of your loan.
- Tax deductibility. Before choosing any business loan, find out how it will impact your tax liability. For example, if you opt for equipment finance, you may be able to claim loan interest charges and the depreciation of the asset you buy as tax deductions.
How should you compare business loans?
Make sure you consider the following factors when shopping around to compare your farm loan options:
- Interest rate. The higher the rate, the more your loan repayments will be. Remember, too, that some loans come with a fixed rate and others with a variable rate, so you'll need to make sure you're comparing like-for-like products.
- Fees. Fees are another crucial factor when determining the cost of a loan. Look for one-off, upfront fees (such as application and establishment fees) as well as ongoing charges.
- Loan amount. Minimum and maximum loan limits vary between lenders and depend on the type of finance you choose, so check any limits in the fine print.
- Repayment schedule. When do you need to make repayments and how much will your regular repayment be? Can you tailor a repayment schedule to suit your income?
- Repayment flexibility. Can you make extra repayments without incurring any fees? Can the loan be repaid seasonally – in other words, can you repay it during the times of the year when your farm has the most cash flow?
- Bundling options. If you're looking for a wider range of banking solutions for your farm, check to see whether the loan can be bundled with other banking products, for example a transaction account that can also be used as an offset account.
- The lender. It's also worth checking the agribusiness credentials of any lender you're considering. Does the lender have a long history of providing financing to farmers? Does it understand the funding needs and risks you face?
How do lenders approve farmers for a business loan?
Lenders will assess a number of factors when considering your application for a business loan, including:
- Your financial situation. The lender will consider your bank statements, income, assets and debts when determining your borrowing power.
- Your credit history. A good credit history can improve your borrowing prospects. Find out how you can improve your credit score here.
- Financial projections. Depending on the type of finance you need to access, the lender may request cash flow projections and other forecasts before approving financing.
- Security. Providing an asset as collateral can improve your borrowing power.
How to apply
It's often possible to begin the application process for an agribusiness loan online. Alternatively, you may wish to call your chosen lender first to discuss your financing needs and the products they have available.
If you need specific advice on finding the right loan and how to apply, it could be worth chatting to a finance broker about your requirements.
Kevin's farm finance
Kevin runs a 300-acre tea tree farm in northern NSW. When his ageing tractor's mechanical problems keep delaying the harvest, putting Kevin behind schedule and costing a substantial amount in man hours and repairs, Kevin decides it's time to invest in a new tractor.
However, Kevin doesn't have the $50,000 needed to buy the model he wants, so he decides to compare his loan options. After studying a range of equipment finance solutions, Kevin chooses a commercial hire purchase arrangement which will see his bank buy the tractor outright, and Kevin then purchase the tractor from his bank in instalments.
This gives Kevin the freedom to pay off the loan over a term of five years, while he can claim both the interest on his loan and the depreciation in the tractor's value as tax deductions.
Frequently asked questions
Can I access any concessions to help provide the funding I need to run my farm?
Yes. Under the Farm Business Concessional Loans Scheme, the Australian Government has made $250 million available to farmers until 30 June 2018 for the following:
- Drought Assistance Concessional Loans
- Dairy Recovery Concessional Loans
- Business Improvement Concessional Loans
You can find more information about the Farm Business Concessional Loans Scheme on the Department of Agriculture and Water Resources website.
Does the fact that I'm a farmer entitle me to special deals from lenders?
Yes. Many lenders offer specific loans and interest rate offers that are only available to primary producers.
What does the term "seasonal finance" mean?
Seasonal finance refers to loans and lines of credit that only need to be repaid during the months when your farm earns a profit.
What information will I need to provide when I apply for a farm loan?
You'll need to provide bank statements, tax returns and cash flow projections to prove your income. Other documentation required will depend on the type of loan you apply for.