Financing Investment

Major capital investment on farm takes place every 15 to 20 years and includes such items as livestock housing, silos, milking facilities and slurry storage handling systems. Land purchase often arises when the opportunity presents itself and does not follow a set pattern.

Significant building investment is cyclical and is incurred by each generation farming. On the majority of farms these investments require the use of all or part borrowed finance and careful planning is required at the outset.

Before embarking on a major investment a number of issues must be considered prior to commencing work, consider the checklist below:-

1) Stage of business development, will farming be continued by the next generation.

2) Ability to repay borrowed finance related to current farm profitability and level of efficiency.

3) Cost of project with future expansion options potential.

4) Sources of finance from within and outside of the business.

Work through each issue taking into consideration the overall aim as to which direction you wish to take the business.

Many farm businesses are at a crossroads with regards to major investment. The issues of reduced profitability linked to labour, land availability will shape future investment decisions. Ask yourself where is my business in the scenarios below.

Are you

a) a developing business with a successor wishing to expand further?

b) considering part-time farming and investing to reduce workload and ease of operation?

c) anticipating to retirement with no expenditure considered?  

If you are in either category a or b, above do you know your current level of profitability? How efficient are you compared to the best in your particular farming system? What is the ability of the business to repay borrowing, relying solely on farm profits or a combination of on and off farm employment.

The worst business decision, is to invest and grow an already technically inefficient business. You must know how your business compares? To answer this question consider benchmarking your business or join a local business challenge group organised through your Greenmount adviser. Challenges and benchmarking groups operate for all major enterprises.

Having decided that investment is necessary for your business, design and the correct layout will ensure best use is made of the new facility. Take into consideration lifetime of the project and likely changes in the next few years. For example milking parlours with auto id, automatic shedding facilities, and backing gates in collection yards all simplify and reduce labour input. This is critical as labour is becoming more expensive and less available.

Take future expansion into account, a number of units built in the past soon were too small or too labour intensive to meet modern requirements. Poor design also made further expansion difficult.

Having costed the investment, and assessed your businesses profitability the level of repayments which can be sustained by the farm business can be calculated. The next question to answer is, where do you source the finance and what borrowing / loan facilities are available.

The main Northern Ireland banks have loans available which can be matched to the lifetime of the asset. Term loans currently being arranged range from 10 to 20 years with 25-year loans available for young farmers. Both fixed and variable rates are on offer, however with the projected fall in Bank of England base rate likely in late summer onwards, the variable rate option may be more suitable.

In the event of farmers having to incur extra costs, which had not been envisaged e.g. larger slurry tank, some lending institutions will allow interest only payments to be made until grant aid through the Farm Nutrition Management Scheme is paid. This flexibility will help in situations where cashflow is tight.

In order to secure the best possible deal and financial package for your business, prepare a plan, know your costs and look at the businesses projected profitability in the coming years. Having such information at hand will aid your relationship with the lender.

For young farms under the age of 40, who have become head of holding within the previous 12 months an interest rate subsidy over five years is available through the New Entrant Scheme which is currently open for application until 5 June 2008. For further information on the scheme contact Colin Rea, Greenmount Campus, CAFRE, tel. 028 9442 6609.