printStock Journal Article - July 2024
Author: Chris Scheid, Moore Australia
The rapid expansion in farmland acquisitions has seen farm balance sheets strengthen, financed by cheap interest, serviced by strong commodity prices and good seasons the times have now changed! Strong balance sheets alone do not assist with debt servicing.
Seasons and commodity prices volatility has returned and so too has a more ‘normal’ farm interest rate environment with ‘farm interest’ one of the largest expenses I now see in cashflow budgets. Servicing debt is now back as a #1 priority for many farm businesses and banks.
How can we service debt when new working capital may be required to get us through this current dry spell and when the next interest rate ‘relief’ may not be until the start of 2025? Lower interest (Regional Investment Corporation or RIC) loans, currently at 4.99% per annum for 5 years interest only - are available for eligible applicants. This is about a 2% interest rate differential for many farm business.
RIC was established in 2018 and since then, RIC have established some real capacity as support lenders for rural businesses with $3.31 billion in loan funds settled, 3081 loans settled and an estimated $268 million of interest saved by borrowers (1/7/18 to 30/4/24).
RIC are ‘support lenders’ (up to 50% of term debt, excluding plant & machinery loans) not substitute lenders (100% of total debt) as all RIC loans settled must keep up to 50% of their total debt with their existing commercial lender.
Since 2018, 94% of all applications are covered in 3 types of RIC loans:
Loan 1: ‘Drought loan’ provides for vital funding for operational expenses, infrastructure improvements, and other essential needs during periods of current/future drought – 75% of all applications since 2018.
Here, an applicant does not need to be in a drought declared area (Exceptional Circumstance). However if the applicant is experiencing a significant financial impact due to drought or if they are preparing for drought and the farm business has experienced a significant financial impact outside of their control in the past 5 years, and the financial impact will last for a consecutive 2 year period it is worthwhile investigating the Drought Loan .
Uses of ‘Drought Loan’ include preparing for future droughts (eg water & feed infrastructure), fund current drought activities (pay outstanding fodder, water carting bills), fund drought recovery activities (planting, pasture renovation, restocking) and refinance debt at lower interest rates to improve cashflow.
Loan 2: ‘Agri Starter Loans’ (4% of all applications since 2018) come in 2 forms – firstly, ‘succession loans’ that assist business undertaking succession or who have recently completed succession planning or secondly, ‘first farmer loans’ where new farmer entrants who are seeking to purchase, establish or develop a farm business in which is held or will hold in the future the sole/controlling interest. Leasees or sharefarmers wishing to purchase, establish or develop a farm business can apply even if they will no longer be involved in Sharefarming or leasing as they are owning.
Loan 3L Farm Investment (RIC – ‘Farm Investment Loan’) are designed to provide financial assistance for the business accessing markets interstate or overseas, to prepare for, manage through or recover from severe business interruption (eg 2022/23 Murray River floods) – 15% of all applications since 2018.
For each of the loans the loan terms are: $2 million maximum amount (with at least 50% of total term debt, excluding Plant & equipment loans staying with your commercial lender eg if total term debt was $5million, maximum RIC loan would be $2million; if total debt were $3million, maximum RIC loan would be $1.5million); a 10 year loan term applies whereby you can stay after 10 years and pay principal and interest repayments or refinance back to your existing commercial; annual interest payable is 4.99%pa (reviewed Feb and August annually); 5 years interest free with no loan redraw or application fees.
For each of the RIC loans above applicants must demonstrate that they are in financial need of the loan, with sound prospects of ongoing financial viability and meet other eligibility criteria.
In addition to the above, the RIC ‘Drought loan’ applicants must supply Drought plan (proof, manage and recover) with a cashflow budget (to year in year out) that demonstrates the investment required for your Drought plan.
Before any application, it is strongly recommended you read thoroughly the guidelines for the RIC loan relevant to your circumstances at www.ric.gov.au If you are in any doubt as to your eligibility or need to clarify the guidelines a free phone call assistance is available on 1800 875 675.
The application process (online) is now very user friendly and easy to navigate. Applicants can ‘save as they go’ and return and even ‘share’ their application with their adviser to obtain their assistance.
Once successful, like any bank loan, RIC require an annual bank review to ensure serviceability and loan conduct (purposes of borrowing) are as per loan agreement and are being met.
Yes, the assembly of RIC required information (like all banks) will take you time – maybe a day! But consider if you’re able to obtain the maximum loan amount (of $2m) at a current interest differential of 2% over 5 years (interest free) that’s $200 000 in saved interest! On that basis, your 10 hours of work equals $20 000/hr work. If you can find a better ‘pay rate’ than $20 000/hr, then do that work instead!
It will only cost you 15 minutes to check your eligibility and see if you can join the 3081 other farm business who are using RIC loans to assists their businesses future.