Banking For New Entrants to milk

Production

June/July 2012

New Entrant Background

• Capital is difficult to acquire

• Banking industry issues

• EU financial issues

• Quota is a a challenge

• Milk price is now cyclical

• Single farm payment is under review

• So Difficult Environment!!

Types of Finance

• Bank Loans 5-6%

• Overdraft 9-13%

• Hire Purchase/leasing 6-10%

• Credit Union 8-11%

• Merchant Credit 12-14%

• Contractor 5%?????? (sometimes none)

• Credit Card 18%+

What the Bank Needs!!!

• Repayment Capacity

• Security

• Margin

Costs of funds (6 month Euribor)

• Euribor 2009 1.57%

• Euribor 2010 1.17%

• Euribor 2011 1.62%

• Euribor 2012 Declining currently

• 6 month Euribor now 0.95%

Costs of Funds for bank

• Euribor 6 month 0.95%

• Irish Bank cost 1.26%

• Bank Margin (3-4%) 3.5%

• Total 5.71%

• Do cash flows @ 7.5% at least

Security

• Now requires a legal charge

• Split folios if possible- allows flexibility

• Present and future borrowings need to be considered

• Don’t put all eggs in one basket

• LTV can effect rate

• May ask for more than adequate security

You Look for• Longest term Possible (cash flow will be

the challenge)• Rate referenced to Euribor• Transaction/transfer costs – what are they• Security- as little as possible• Follow the Top Man• Relationship/farmer friendly• Try to get banking person to visit your farm• No point in getting good rate if you cant get

the money!!!

Independent advice

• Study loan offers carefully

• Read the fine print

• Ask if you are not sure

• Watch out for early payment penalties

• Review period

• Review security

• Don’t sign in a hurry!!

Your Image• Professional, Best Farmer, Growth

potential, ambition, etc.• Complete knowledge of your profitable

business• No ifs, buts or don’t knows• Profit monitor• Business plan• 4 yr accounts• Tidy office & prompt replies to bank• Demonstrate you can live within your means

Fall Back Position

• Multiple banking if possible

• Cash is king: so must have a reserve

• Robust projections on milk price, inputs interest rates etc.

• If it goes wrong, what is exit strategy?

• Understand taxation and welfare positions

Overdraft

• Typically 4-5% above loan rate

• On a well run €25k overdraft facility costs about €1k.But badly run €3k+

• Utilise the full amount of overdraft for short time during the year

• Adhere strictly to the 30 day rule.

Leasing

• Asset will usually satisfy security

• Interest rate is fixed for term of loan

• Early termination costly

• Merchant/supplier based

• Real cost is reduction in bargaining power

• Can make use of it strategically