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Risk assessed interest rates

Down on the farm interest rates are now linked to your balance sheet results!

It has become clear that banks are now completing a risk assessment on every farming business. I have identified the following four points as being key issues the banks consider :

1. Analysis of your Annual accounts profit and loss statements, for the last three years.

  • Losses will mean a higher interest rate.
  • Moving from a loss to a profit will result in an improved interest rate.
  • Large loans no longer attract a low interest rate, in fact large loans are perceived to have more risk and may be priced accordingly.
  • Historical losses will take a while to drop off.

2. Debt/Asset ratio

  • If your debt equals your asset value the rate is going to be higher.
  • If debt is 20% of your asset, the rate will go down.

3. Risk

  • Does the farm flood?
  • Are there seasonal droughts?
  • Are you reliant on a lot of bought-in feed?
  • Is it a high cost/low margin farming business?

4. Personal Factor

  • Can you do the business, manage the money and the property?
  • Are there adequate checks, balances and recordings going on?
  • Are personal drawings realistic and under control and are actual vs budget being adhered to and copies sent to your bank.
Looking at the interest rate numbers, the figures are roughly like this :
90 day bill rate say 2.60%
Cost to raise the cash say 1%
Bank's margin - to run the bank, profit, and risk say 1.50%
Base cost of money 5.10%
Then the bank assesses the "risk" margin
Low risk interest rate 0.90% 6.00%
High risk interest rate 4% 9.10%

The other factor in all this is that the Reserve Bank now requires your Bank to hold money on deposit against every loan.

For example, if you have a "risky" loan of say $1,000,000 the bank may have to hold $100,000 on deposit. If you have a "safe" loan the "holding" may only be $50,000.

Summary

  • Every business is now risk assessed with the interest rate priced according to that perceived risk. The whole banking business has changed for the better.
  • It is a good thing because it is ensuring the Banks are taking care and covering themselves for the untoward.
  • It also allows us to go into the bank and ask what we need to do to improve our rating and subsequently our interest rate.
  • Finally, it will make us focus on profitability, and running a sustainable business rather than asset building and posting losses.


 

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