02 Feb It’s all about Loan Serviceability

By Brad Sewell

RSP is always fielding requests from borrowers to assist with the purchase of additional land. While this type of work is our bread and butter, many clients have become fixated on the fact that because their existing land holdings have risen sharply in value in recent years, they should be able to borrow more from the bank, because banks lend up 60% to 70% of land value.

What has been forgotten by many is that of greater importance to a lender when assessing increased lending is your ability to repay the debt through cashflow. A bank will determine your ability to repay debt by primarily relying on historical financial information such as financial statements (eg profit and loss, balance sheets etc) and tax returns. Of near equal importance is what your projected future income and surplus funds to repay debt will be, especially given that the purchase of additional land would equate to extra production and income.

What is important to note is that lenders are placing more time and resources to assess the credibility of the cashflow forecast in terms of income (enterprise program, commodity prices and seasonal conditions) and expenses (eg have you factored in rising fuel, chemical and fertiliser costs).

In terms of farm income, a lender will typically accept current commodity prices for the next 12 months projections. However, for the second and third year projections, a lender will expect to see prices more aligned with the 10 year average. As an example, cattle prices used in the second and third year cashflow need to be lower than current prices. Lenders are generally happy to provide guidance on what prices they will accept for medium to long term projections.

Once a lender is satisfied that your historical financial performance aligns with and/or underpins your projected financial performance, they will also sensitise the loan repayments. That is to say they will look at your capacity to repay the loan over 15 to 25 years on a principal and interest basis (i.e. paid out within the term) at an interest rate 2%-3% higher than the current rate.

So despite the fact that you might have plenty of land security to offer the lender, the more challenging part of acquiring the finance is to show you can repay the loan under stress tested parameters via future income that can be reasonably proven by what you have achieved in the past and what you can realistically generate in the future.