Why Traditional Bank Loans Might Not Be the Best Fit for Modern Farming

Farming today requires much more capital than it needed 20 or 30 years ago. You’ve got the good part of £100,000 tied up in a tractor that can drive itself, a whopping great mortgage on your farm, and that’s before you even start on the cost of fertiliser or the price of biopsy equipment to test your herd.

Why fixed repayments and seasonal income don’t mix

A crop farmer isn’t paid every month. Income comes all at once, which is linked to the harvest period. However, the costs are regular and consistent throughout the year, such as seeds, fertilizers, fuel, and labor. The same applies to a livestock farm with all inputs. Traditional bank loans do not consider this factor. You take out a loan, repay the same amount every month. A loan with no repayments during the months you’re spending the most, or when you have no income may be a preferable choice. But in case of farming, you will be repaying in full on months you have no income or high expenses. Most of these products allow you to draw the total facility within a year, but you still have to pay the bank back at an agreed rate each month whether you’ve spent that yet or not.

Banks aren’t equipped to value AgTech

Here’s an issue that’s never discussed in the context of whether to lease or borrow: how are agricultural assets valued for loan security? Specialist agricultural equipment – precision planting systems, automated milking parlours, biomass boilers – needs someone who knows what it does and what it’s worth to assess it properly. Most bank lending teams don’t have that sector expertise in-house.

The upshot is that either the sophisticated piece gets under-valued and you receive a loan offer that won’t cover the actual order, or it gets placed in the ‘unusual, therefore too risky to value’ bucket and you’re declined on account of your lender being unfamiliar. Farmers are prevented from investing in technology that would undoubtedly improve their yields or reduce their costs, not because the investment makes no sense, but because the bank can’t get its head around it.

But that’s exactly where specialist providers fill the gap. Agricultural Finance covers a much broader range of assets than those funded under a simple lend or HP/loan – everything from combines and irrigation systems right through to renewable energy and processing plant – and that’s because the lenders involved are sector specialists.

The collateral problem

Banks prioritize security and in the case of a business loan, this usually implies land charges or an “all-assets” debenture, which puts the entire farm business in jeopardy for a single piece of machinery. Hence, a farmer shouldn’t risk their land for a combine harvester.

Asset-backed lending secures the debt based on the machinery for which the loan was taken. If the loan defaults, the leaser reclaims the asset, not the farm. This matters a lot to family businesses with small balance sheets for whom losing the land is tantamount to business failure.

The inflation adjusted and technology-included cost of farm machinery has been estimated to have gone up by at least 25% over recent years (NFU Mutual, 2023). This pushes up the ‘collateral’ issue under the traditional model of lending. More expensive machinery means bigger loan sizes, which in turn foster greater security needs from banks already pricing the farm sector as if it were high risk.

Speed matters at harvest time

Machinery failure doesn’t adhere to borrowing schedules. If your harvester breaks down and you have a two-week window in which to bring in the crop, this is not an issue you can wait around with while a bank takes four to eight weeks to agree a loan. The paperwork required makes them an impractical solution for urgent problems.

Agricultural lenders will typically make a decision and process a loan in days, and are set up to deal with the urgency of operational agriculture.

Diversification doesn’t fit the standard template

Farming has changed. Farmers are turning outbuildings into holiday lets, putting in solar arrays, running farm shops, and producing biomass energy – often doing these activities as a form of income diversification against volatile commodity prices. They also happen to be projects that stack up economically and increasingly have regulatory support as they are tied to environmental targets.

Unfortunately, traditional lenders see these as departures from the “lend against land and some cattle” approach and the risk profile they know and are comfortable with. A farm that is also a small hospitality business doesn’t fit easily into the agricultural lending box or the commercial property box. Therefore, it falls through the gap between the two.

Specialist lenders who work across the agricultural sector regularly finance these hybrid projects because they understand the economic logic and the solid (usually property-backed) loan they can make.

From debt-heavy to asset-smart

Switching from conventional bank loans to other sources of finance, whether it’s VC or hire-purchase/operating lease type arrangements, is not about rejecting the banking sector. Banks are still a fundamental part of the system for everyday cashflow, the important point is that suitability and structure need to fit.

For example, one of our clients is a farm and they have a very good relationship with their bank manager for exactly that – day-to-day banking. But when it comes to long-term investment, banks often don’t have the specialized knowledge to properly assess lending risk-profiles for equipment/capex finance.