How your agrifinance broker can help you prepare for your annual bank review

You’ve packed away the Christmas tree, the summer holidays are done. And while you might be focused on the recent (or upcoming if you are a grape grower) harvest, at the start of the new year, there’s something else you need to consider.

Your annual bank review.

The thought of this might induce boredom, or worse, fear.

But it shouldn’t.

As an agrifinance broker, helping prepare for an annual bank review is just one service I offer my clients. So, in this blog, I’m going to share some tips for getting the most out of your review process.

Your bank’s role in your business

Whether you like it or not, if your farm or agricultural business has borrowed from the bank, they’re an investor in your farm. So having a good relationship with them is vital. It’s important to provide them with timely, accurate, and relevant information. In good and bad times, this will help you access more competitive and appropriate finance.

Why your annual bank review is important

One of the main outcomes from your review will be your lender confirming your lending rate. The financier will quote a base rate and then add on a customer margin. This margin is unique to the person and their business. It’s determined by the financier’s perceived risk in lending money to the business.

So, before we go on, it’s probably a good idea to look at how the banks work out the base rate and customer margin.

Base Rate

The 2 most important numbers are the:

• Official Cash Rate – set by the Reserve Bank of Australia (RBA)
• Bank Bill Swap Rate (BBSW) – set by the market

Every day, banks have transactions to execute, including retail and business purchases, credit card payments and payroll. There’s no reliable way of predicting how much those transactions will be. Inevitably, some days, banks will have more money going out than coming in.

So, they need to borrow cash.

Where do they go? The bank.

An overnight loan based on the Official Cash Rate (currently 3.1%) is the cheapest option. This is reviewed monthly buy the Reserve Bank. The next cheapest way is a short-term loan (1 – 6 months). These are loans between banks in the wholesale markets based on the BBSW (currently 3.18% for one month or 3.74% for 6 months). These rates change daily.

The 6-month BBSW is higher than the cash rate, so banks are paying more to cover their cost of funding.

Connected to this is the Bank Bill Swap Yield (BBSY). This is the reference rate when setting customer funding costs in the business lending market, equivalent to BBSW + 0.05%. If you have a market rate loan, you’ll see this referred to in your letter of offer when the bank quotes your interest rate. This means that if BBSY goes up, you pay more interest.

Banks, like every other business, want to make a profit. They set their lending rates to maximise the profitability of their lending. But they also need to manage the risk that some borrowers won’t repay their loans.

As lending rates increase, demand for borrowing could decrease, which could reduce the bank’s profits. It’s a balancing act.

Customer Margin

Your lender will consider the following factors when calculating this margin:

Cash flow – can you generate enough cash to meet their costs?

Character – are you honest? Has your previous conduct and management ability been good?

Outside factors – how would the death of a partner, marriage breakdown, poor health or drought affect the business?

Capital – how much equity do you have in the business? The higher the equity, the lower the risk.

Risk profile –can your business manage external risks, like industry downturns, climate variations, and interest rates?

Security – what security can you offer? Is it saleable and is its value sufficient for the loan requested? The lower the ‘loan to value ratio’, the lower the risk.

This is the negotiable part of the loan and there are strategies we can implement to reduce the customer margin.

• Provide information as requested and be open and honest with the financier.
• Have confidence in yourself and in your business plan.
• Know the content of cash flow projections and be prepared to explain the numbers.
• Understand financial statements and be able to explain seasonal anomalies.
• Have strategies to manage external risks.
• Understand your industry and current policies and trade conditions that may affect it.
• Discuss the customer margin and ask how you can improve it.
• Be prepared to shop around. The finance market is competitive.

Preparing for your annual review.

Given the impact your annual review can have on your interest rate, and thus your overall financial position, you need to get it right.

Preparation is key.

A well-planned review will give your lender confidence that you’re continuing to plan, manage risk, and make disciplined financial decisions. And because it is so important, it’s worth getting your broker to help you pull all the information together.

So what do you need for an annual review?

Putting together an annual review is more than just downloading a few reports from your accounting program.

That’s where having a trusted advisor in your corner can make all the difference. They’ll identify all the information your financier needs and present it to the bank as a report.

It may include:

• asset and liability information
• historical management reports
• cash flow budgets
• a farm plan
• risk management and succession plan

Make sure your information tells an accurate story of where your farm business is at, and where you want to go.

Be honest about challenges and if there have been mistakes, show how you’ve learned from these and overcome them.

Share your vision for the future, and be sure to show that you’ve got options if your original plans don’t work out. Showing the banks you’ve identified risks will provide greater confidence.

Using a professional advisor who understands banking requirements will ensure your report highlights the assumptions you’ve made for the income and expense items in the budget.

But you also need to understand what you’ve included in the report, which is something your adviser can help with.

Getting the most from your annual bank review

Banks need to lend money. It’s how they make their profits.

But that doesn’t mean you should just cross your fingers and hope for the best with your review.

As rates increase, you need to manage your debt proactively. You need to work on the parts of your debt strategy that you can control. If you haven’t paid attention to managing your debt risk (loan terms, interest rates, covenants, and your lender), you’re probably paying too much for your debt.

You should always review and manage your debt strategy regardless of the market conditions. But in the current uncertain market, it’s more important than ever.

So, don’t blame the banks.

It’s up to you to manage your debt and get the best rate for your circumstances.

You need to ensure your debt strategy is appropriate and flexible to see you and your business through the variabilities of agriculture. 

Ensuring you provide detailed information in your annual review will help you get competitive rates and the most effective loan structure for your business.

Over to you

If you have questions about putting together your annual review, send me an email.

And if you know other people who would benefit from the information in this blog, please share it with them.