Being prepared when dealing with a bank

Expansion on the farm, whether by purchasing additional land, erecting new buildings, purchasing additional machinery or livestock will involve approaching the bank requesting finance. In order to arrive at a decision, the bank will ask for various pieces of information and documents. Throughout its decision making process the bank is trying to assess the farmer’s ability to meet the repayments.

It is therefore critically important that, at the time of application for funding, the farmer makes a professional approach with up to date financial accounts which are less than six months old supported with explanations for unusual trends. In addition very detailed information is required in relation to the additional finance sought and its impact in the future of the farm business. In many cases, the bank will request that a Business Plan is prepared.

The accountancy bodies and the Irish Banking Federation have jointly published guidelines as to how to present a winning Business Plan to a bank. These guidelines are a framework to allow the farmer to present the funding application professionally, demonstrating ability to repay, the effect on the future of the farm business, and facilitates faster decision making by the banks. The guidelines suggest headings for a Business Plan, format for a cash flow and suggested review by the accountant and farm enterprise advisor.

The Business Plan should include an executive summary describing the current business, the proposal, current financing arrangements and proposed financing arrangements to deal with the volatility or expansion. The summary can be followed with sections on the track record and key achievements of the family, for example, benchmarking reports; skills on the farm; details of the succession plan; reason for expansion and the implications of the proposal on the family, for example, additional outside labour required.

A key section of the Business Plan is the track record of the applicant. In this regard, annual financial accounts for each of the last two financial years will be required to be attached to the Business Plan. It is important that these accounts are reviewed, in consultation with the accountant, to ensure that they reflect the true trading result and that the assets in the Balance Sheet are included at realistic values. Disclosure notes, where appropriate, should be attached to and be part of the accounts.

A further section of the Business Plan should be the request for finance. This should be clearly set-out showing the total cost of the expansion; the amount of the farmer’s contribution; the amount of other borrowings for example, family or asset finance and the amount sought from the bank. The timing of the proposed expenditure; a proposed repayment schedule and details of security available should be included here.

The guidelines have suggested headings and lay-out for a cash flow forecast. The inclusion of a cash flow forecast in a Business Plan indicate that the applicant has considered whether the business will have sufficient cash to meet repayments, interest and the living expenses of the family. The information is usually presented on a monthly basis, starting with the opening bank balance; money received; money paid out and the closing bank balance. The cash flow forecast is a critical part of the Business Plan, but has its limitations by virtue of being a statement of future financial information. In order to ensure that it is as realistic and achievable as possible different scenarios should be addressed, for example, different prices for the key farm output and similarly for key farm inputs. This is done by the technique of senility analysis.

The final section of the Business Plan should include a commentary or review by the accountant and farm business enterprise advisor as to the prospects of achieving what is detailed in the Business Plan and cash flow forecasts.

The farm family must be involved in the preparation of the Business Plan and cash flow forecast, take ownership of the document, be fully aware of the contents and present it to the bank. A thoroughly researched Business Plan together with up to date financial accounts will enable the farm family to make an informed decision and obtain an appropriate financial package, at the most competitive cost. This is particularly timely in a period of volatility and in the context of the farm business improvement scheme to be announced shortly by DARD.