Is Your Bank Loan Actually For 20 Years?15th March 2017
Over the period up to the banking crisis in 2008 many banking products became more and more complicated with offerings such as Caps and Collars, Fixed Rate Options, Euro loans and promotions, which, at the time seemed attractive.
“”Hindsight now tells us that for many agricultural businesses some of these were perhaps inappropriate and that the risks with some products and lending facilities outweighed the benefits. Some loans appeared to be for a long term i.e. 20 years, however many of them had written within them 5 yearly credit and rate reviews.” says Tim Parsons, Director and (AMC Agent).
Here he looks here at some of the issues that farmers are currently facing as a result:
“Since the banking crisis the number of products on offer from the banking sector to Agricultural businesses has in terms of the clearing banks certainly simplified. In addition, with agriculture seen as a safe investment and the continued drop in interest rates, lenders’ appetites to support the agricultural sector has been reasonably strong.”
The products on offer now are much more straightforward, however it is very important that businesses continue to be absolutely certain, about the lending facilities they are taking up and what they actually offer.
Tim says “The devil is in the detail. So a business needs to be clear about the terms of the loan at the outset. It is crucial that the fine detail of any loan offer from a lender is looked at in order to determine whether that product is entirely suitable for the business and the purpose for which the borrowing is being taken.”
Generally banks are in business to produce a return for their shareholders. In traditional lending, they do this through the margin which they charge on the lending above their cost of funds, together with additional administration fees. A business therefore needs to be clear at the outset about what they are actually getting.
“There is an increasing move amongst a number of lenders particularly in regard to term loans and mortgages to what are known as part-amortising loans” says Tim.
“Essentially these are loans which although perhaps appear to be for a long term i.e. 20 years, they often have within them a 5 yearly credit and rate reviews. This may also involve a full repayment of the loan and a new facility to be drawn up.”
These reviews give the lender the opportunity to reconsider the arrangement with the business at each specified point within the longer term i.e. every 5 or 10 years through a 20-year term. This enables them to renegotiate the arrangement, the margins and charge additional arrangement fees.
“So, what on the face of it appears to be a 20-year arrangement is actually only in reality a five or 10-year arrangement!” says Tim
“There are some lenders such as the AMC who will guarantee the margin on their loans for the entire term of the loan with no reviews. This has a significant benefit in providing certainty to a business in times that increasingly look volatile. That will provide certainly which might be invaluable in the future.”
The old adage “always read the small print” has never been more important in considering your business finance. Make sure that whoever you are borrowing from and whatever you are being offered suits your needs and delivers what you expect it to. Taking on a facility which does not deliver in the right way and which may later need to be unravelled can sometimes incur significant cost (in time and money) to re-arrange and will ultimately be of no benefit to the business.
Tim advises that: “All businesses should always take independent professional advice when taking on borrowing, to ensure that offers from lenders are being compared on a like for like basis and that the product you opt for is actually what you need.”