Successfully Navigating Farm Loans

My guest for this episode is Greg Kuchel, Senior Insights Manager at Rural Bank who spoke recently at the “Raising the Roof” conference in Hunter Valley of NSW about farm loans in particular for infrastructure loans related to cow housing facilities. Greg and I had such a good discussion that we have turned this into a two-part series. This first episode covers the general principles and considerations when approaching banks for finance – what you need to do, information you need to provide, what banks are looking for from you and in you and the types of loans available. In the next episode we move into financing large infrastructure projects on farms, so remember to tune in next month for part two!

Links to useful resources related to this podcast:

Rural Bank Insight Reports

This podcast is an initiative of the NSW DPI Dairy Business Advisory Unit

It is brought to you in partnership the Hunter Local Land Services

Please share this podcast with your fellow farmers and colleagues and feel free to contact us with suggestions or comments via this email address thebusinessofdairy@gmail.com

Further NSW DPI Dairy channels to follow and subscribe to include:

NSW DPI Dairy Facebook page

DPI Intensive Livestock Twitter feed

NSW DPI Dairy Newsletter

Transcript

Produced by “Video Lift”

The information discussed in this podcast are for informative and educational purposes only and do not constitute advice. 

Transcript

The Business of Dairy 

Episode #35 Transcript – “Successfully Navigating Farm Loans”

Sheena Carter:                                                                                                                                              Welcome to the Business of Dairy podcast, I'm your host, Sheena Carter. My guest this episode is Greg Kuchel, Senior Insights Manager at Rural Bank, who spoke recently at the Raising the Roof conference in the Hunter Valley of NSW, about farm loans, in particular for infrastructure loans related to cow housing facilities. Greg and I had such a good discussion that we’ve turned this into a two-part series. This first episode covers the general principles and considerations when approaching banks for finance – what you need to do; information you need to provide; what banks are looking for from you, and in you; and the types of loans available.

In the next episode we move into financing large infrastructure projects on farm, so remember to tune in next month for Part 2.

Sheena Carter:
Welcome to the podcast, Greg. It's great to have you as my guest today. Having spent some time with you at the Raising the Roof conference in the Hunter Valley recently, where we were on a panel together, could you just give our listeners some insights into yourself, your background, and your role with Rural Bank?

Greg Kuchel:
Yeah, g'day all. Yeah, look, I suppose I'm at present a Senior Industry Insights Manager for Rural Bank, and I'm based in Swan Hill in northwest Victoria, and I've lived here for a number of years. My background, I grew up on a dairy farm in South Australia, so I've always had a dairy farming background and always been obviously involved from a banking perspective right through my whole career. I worked for Rural Finance, which is a Victorian government-owned bank, for the first 15 years and then we were bought by the Bendigo Bank, and then obviously became Rural Bank after that. So essentially, with one career over 26 or so years, all through western Victoria, so I’ve worked in Warrnambool, Swan Hill, and Mildura. So yeah, had a fair cross-section of most agriculture industries, but certainly pretty well the dairy industry all the way through my life.

Sheena Carter:

Yeah, excellent. That's great to hear. So you'll understand, sort of, farming –
a dairy farming perspective, which I think is often a challenge in the big game
of the finance world these days. It's always good to have someone that you can
engage with who understands what you're dealing with.

Greg Kuchel:

Yeah, no exactly. And look, the dairy industry, I think of what it has gone
through in my time, and then I start talking to my dad who's now what, 82, 83,
and started milking cows – left school when he was 14 – and started milking
cows, from there and where it's got to today, and where it's going to go to,
it's great to see such a progressive industry over those times and what
improvements we've seen. And never underestimate a farmer's ability to grow and
adapt over time and adjust to things. So, yeah, it's been great to be involved
but also watch it from the sidelines as well from a banking perspective.

Sheena Carter:

Yeah, yeah. And I guess you're one of that unique breed that's been in the same
job, same role, for a prolonged period of time. So you've got lots of
experience up your sleeve.

Greg Kuchel:

Yeah, it's a bit unusual to find someone that's been in the same… haven't
certainly had the same job for the whole time but with the same organisation
essentially yeah, it's a bit unusual that's for sure. You rack up a good lot
along service leave which is good. 

Sheena Carter:

Yes. So Rural Bank, can you just explain a bit about Rural Bank? It's part of
Bendigo Bank?

Greg Kuchel:

Yeah, so Rural Bank is the agribusiness arm – agribusiness banking arm – of the
Bendigo Bank. So obviously, everybody would know the Bendigo Bank. And from
that perspective, we realise that agricultural lending and lending to
agribusiness is very different from commercial lending and retail lending. And
you need the right people and the right skills and knowledge to be able to deal
in those industries. So, yeah, that's certainly the way it operates and we've
got, you know, obviously apart from our normal lending activity, we've got an
insights department that provides a lot of reports that are open to the public
for – you don't need to be a customer to be able to access it – a lot of
industry reports, obviously there's dairy industry reports, a lot of outlook
reports and there's probably the one that sort of gets seen and heard a lot, is
the Rural Bank Farm Values Index Report which now comes out every six months
and that's been going for a number of years for people to be able to track what
farm land values have done over the last, I think we're up to now 26 or 27
years of data, so that's a really interesting report to watch, and yeah a
couple of podcasts as well, so yeah, there's some really good information
that's open to anybody on our website which is really informative.

Sheena Carter:

Yep, and I'll admit I subscribe to your insights report and it is, it's good
not only just from a dairy perspective, but just to look across other
industries as well, you know, what’s going on in the grains industries and
things like that.

Greg Kuchel:

I think, you know, obviously a lot of industries cross over and, you know, as I
said, the grains industry is a prime example where there's that cross-section
between dairy and grains, the two of them intertwine a lot, and you've got to
have a good understanding of what's going on the other side of the fence to
know what the impact's going to be from buying in fodder and so forth.

Sheena Carter:

Yeah, absolutely. Now, finance. I think, look, we're going to cover quite a bit
in this podcast on approaching the bank, but can you just give the listeners
some general principles when they're approaching a bank for finance? What are
some things to consider for general loans?

Greg Kuchel:
Yeah, for general loans, I think open and honest conversations from both sides probably is paramount, I think. You've got to be really comfortable with who you're dealing with and I'm and you know, I'm not going to be talking about Rural Bank, I'm talking about banking in general, but just be comfortable with who you're dealing with, the organisation you're dealing with, do they, you know not all bank staff are going to know your particular farming operation inside and out, and accept that, but you know do they understand the industry? And you're going to have to help them a bit to understand how your operation particularly works, and that's fine, but yeah certainly be prepared. So, you know, know your information, you know, at the end of the day, the bank is making, firstly, an assessment on you before they even make an assessment on your financials. So, you know, you don't have to turn up in a suit or anything like that ridiculous, but turn up organised, you know what you're there for and expect the bank to ask you some, not tough questions, but just good logical questions. You know, the first question is usually why? And be prepared for it because they're going to ask you that question, so yeah, just put a bit of thought into how you're going to be prepared, what information you're going to have with you, if you don't know the answer that's fine but, you know, how are you going to get that answer for them and so forth? 

So you know, most banks, if I can explain it this way, the titles of people that work in banks are called “relationship managers” and some people go, well, that's a strange terminology, but it is actually a relationship between a bank and the farmer, and that's the paramount bit. So building that relationship first before you even get into the financials and the money side of it.

Sheena Carter:
Yeah, which might surprise some people. I think in any engagement with suppliers, whether that's, we've spoken about grains or whatever, you know, commodities and obviously, you know, finance. As a farmer, you're approaching a bank to lend you money, their money you're asking them for, which you’re ultimately going to have to pay back. So you need to be credible and, I guess, judged as someone that has the capacity to do that.

Greg Kuchel:

Exactly. And it's not a one-off transaction, it's an ongoing relationship. Like,
you can always change bank in five years' time, but if you've got debt, you've
always got a bank that's an equity holder in your business. So it's not like
going and buying a can of Coke or a coffee down the road, you do the transaction;
you walk away and that's it. You've got someone with a stake in your business
long term, so both sides need to be comfortable with that relationship going
forward because in five years' time, things might not be going as well and you
need to get through a few sticky scenarios or there's family issues, and all
those sort of things we all see in farming that comes along, and we've all got
to be comfortable that both sides can handle those situations when it comes
along because it is an ongoing relationship.

Sheena Carter:

Yes, it's a complex game, farming. There's always something around the corner.

Greg Kuchel:

Exactly.

Sheena Carter:

Expect the unexpected. Okay, now when approaching a bank, there's obviously
different types of loans that are available. Could you touch on some of them?

Greg Kuchel:

Yeah, I certainly can. Your stock standard ones, overdrafts are the logical
ones. So they're the most common watch you'd see. So they essentially cover
your working capital requirements during those times of the year when you've
got, usually, a reduction in income and an increase in expenses. And the
expectation from those type of facilities is that you'll clear them for a
reasonable period of time, but they're there for when you need it. They'll
usually come at a higher rate because they're transactional. 

Your term loan lending, so that's more related to land purchases and those type of things and it's interesting, you can have them on a P&I basis – our principal interest repayment, or interest only – and that'll vary depending on what the banks offer. Some banks offer interest only and that's it, some offer P&I and they want P&I, and then you've got clients as well who've got different opinions on interest only and P&I and there is – I suppose if I explain that one, from a purely economics point of view, you can sit there and make the argument around interest only and say, well, look, if I can make a better return from my farming business by reinvesting as opposed to paying my debt back, then more than what the interest rate I'm paying, then it makes more sense to me just keep investing and keep my debt where it is.

 The reverse argument to that also is that if you want to build equity in your business, well you've got to pay debt back and sometimes a bank will actually essentially say, one of the conditions is we want you to be paying back because you're outside of a preferred parameter, or something like that, we need to get some equity back in your business. The other aspect to it, which actually probably overrides it more than anything, is can you sleep at night? So some people can't sleep at night knowing, well, I'm still going to have the same debt that I got today in 20 years' time, and other people can. So chipping away at a bit of debt all the time can actually help people sleep at night because they know, well, I can see my debt going down. So that's your term loans. 

Equipment finance, that's certainly one that's, you know, obviously fairly stock standard in what we see, but you're starting to see now, I suppose, a lot more options in, you know, herd monitoring systems, cow collars and all those sort of things come under, you know, even funding new dairies. Obviously, sometimes some of the equipment inside and vats, and obviously vats have always been financed that way, but they're shorter terms, four or five years, but you can put balloons on the end and then pay them out over a longer period of time from there. So they're probably the three main ones you'd sort of see from a general day-to-day banking perspective.

Sheena Carter:
Okay. And those equipment loans are generally principal and interest?

Greg Kuchel:

Yeah, they are because from a bank's point of view, we're funding a
depreciating asset, so we've got to see that debt repaid. And the term of that
will be determined by – there's some industry standards about how quickly
things depreciate – so you know, what's the resale value of a herd monitoring
system with cow collars, I suspect isn't that great but a tractor’s pretty good
in five years' time so that can influence where a bank will say oh look we'll
do this over seven years or we'll put a 30% balloon on the end and you can do
it, you know, we'll sort that out afterwards, to others where, you know it's
five years and that's it, so it's really related to the depreciation or how
quickly that asset will depreciate and its resale value at that point in time.

Sheena Carter:

Okay. Can you explain to the listeners the term balloon? What is a balloon
payment?

Greg Kuchel:

Yep. So a balloon payment is essentially, so you might say, well, look, I want
to finance a piece of equipment. Most banks will lend 100% of the value of the
equipment, but a balloon payment is a lump sum payment that is due at the end.
So if I keep it really simple, if you borrow $100,000 and you say, I want a 30%
balloon on the end, and it's going to be over a five-year term, you'll pay
$70,000 off over five years and at the end of that five years, you will have a
$30,000 balloon payment and that can either be paid out in cash, so you can
actually basically just pay it out and that's out of the way. The other way
that you often see is people will change over that piece of machinery, so if
it's something that you've got part of your maintenance schedule is, all right
well I change that machine over every five years no matter what, then
essentially that gets paid out by the trad-in or the change over when you're
buying the new machine, or the other way, if it's, as I said, if it's a machine
that's does depreciate over a long period of time and has some good value, the
bank will often say, look, we'll just refinance that balloon over another two
years or something like that, and you just pay it off over that period of time
and it's gone. But the advantage of a balloon is it reduces your commitments up
front for that first four or five years. So you're not trying to pay off what
could be quite a sizable debt in a very short period of time. So it just helps
from a cashflow perspective.

Sheena Carter:

Excellent. Great. Thanks, Greg. Okay, so now let's start with me. I'm a farmer.
I'm a farm owner and I'd like to purchase the neighbouring property. What
information am I going to have to provide to you as the bank so I can try and
secure the funding from you?

Greg Kuchel:

Yeah. So it does become a bit of a paper warfare, but the reality is that most
people that are pretty well organised will have what we would need. So the
basics are we would be looking for the last three years financial statements
for the business. So that's pretty stock standard from that. So that just gives
us a guide of what your income levels have been, your cost of production and so
forth. And at the end of the day, what the level of profitability is within
your business as it stands now. We would be looking for milk statements for
that same period of time as well – and so just your end of June ones – so that
gives us your production level on a yearly basis, and we'd ask, well, how many
cows were you milking during that period of time, so we can work out your per
cow production as well. We'd ask for an updated balance sheet, so a list of
assets and liabilities, and you know, that's pretty simple but I suppose at the
end of the day all your land; your equipment; your livestock – and this is at
market value, so you know, not necessarily if your cow got sent to the abattoirs,
but what would they realistically be sold if you sold them to another dairy
farmer; fodder on hand; off farm assets and all those type of things;
liabilities – banks will always count your liabilities at limits, if that makes
sense. So from an overdraft, if you've got a $200,000 overdraft limit, but you
owe $100,000, a bank will always count it at $200,000 because you could draw it
tomorrow. It's a limit. So all liabilities, creditors, all those type of things
that you've got sitting there as well.

I'll probably get to the most important one in a sec, but the second most
important one is really a cash flow budget. And some people say budgets are
only worth the piece of paper they're… I don't know how many times I've heard
that one. It changes the moment you finished it, and that's probably a fair
point, but there's two reasons that we look at a budget. We actually need to
look at a budget from two perspectives. One is what does your next 12 months
look like to be able to understand what your working capital requirements are
for the year ahead? So the simple question is, from that cash flow, is your
overdraft as it stands today, going to be sufficient for you to be able to
trade for your next 12 months? So that's sort of from that perspective, you
need to be able to do that exercise. 

The second aspect of it is most banks will want to understand what your business will look like going forward from a year-in year-out perspective. So to use your example of the question of, you know I’m buying a block of land next door, well obviously buying a block of land next door comes with more debt but it usually comes with you milking more cows or increasing your production or saving some cost on agistment on the young stock or something, and as a bank we need to understand, well what does that new state of your business look like down the track? So it's a budget I suppose, based on averages, so assuming a normal, an average milk price, what's average, but you know, what's a bit of an average milk price, what's your production expected to be, what's your, you know, how’re your costs going to change from this, and then have a look at that, and that's what a bank will actually really use to calculate your serviceability. They'll say, well look, does that cash flow, that year-in year-out budget you've got there, can you justify it based on your previous financials and your previous production and so forth, to say well look, you're spending meaning X amount per hectare on fertiliser and you're picking up an extra X more hectares, well, does that make sense with the fertiliser figure you've got in here? Just to use an example. And then basically say, well look alright, we'll now calculate your serviceability with the additional debt with this future state of what your business is going to look like and that covers off their serviceability assessment. So that's probably the main point. 

And the other one I'd say is to have a business plan, and I don't mean that to come with a nice glossy folder with 55 pages in it, that's just ridiculous. Some great business plans have been on two pages, you know, on a piece of paper. So, you know, going back to that thing, you know, why? Why are you trying to do this and what's the benefit in it? And having it written down can be quite beneficial for people. So, you know, if you're going to see the bank, they've got more than one client, you know, so they're trying to get their head around, well, your business and how it operates. So, you know, it's probably an important one from that perspective. So invest your time into a business plan and a cash flow, your financials and balance sheets are just a statement of fact really.

Sheena Carter:
Yep excellent. So then you've got all this information from me about all that, you know, stack of paper about my assets, my liabilities, my projected cash flow etc, how do you then use that as a bank to decide whether I get a loan or not.

Greg Kuchel:

Yeah good question and I think, the easiest way to explain it is there's a
terminology within the banking world of the five Cs of credit, and sometimes
you hear three Cs, five Cs, but basically work on five. And if I run through them,
it's probably the easiest way because that will help you understand how a bank looks
at these. So the first one and the absolute number one is the character of the
people we're dealing with. So are these the type of people that we as a bank
want to be associated in banking and supporting going forward? So are they
trustworthy? Do they pay their bills on time? Do they operate within limits?
From an animal welfare perspective, do they look after the animals that they've
got? From an environmental aspect, are there any issues there? We've got a
report any issues of modern slavery with employees and all those type of
things. So you know it's the character of the person, is this someone we want
to really be dealing with, and that is number one. You can have the most
profitable business in the world but you know, if from, you know, the way they
operate then a bank will go no we just don't want to be involved in this. So
that's number one and that's part of that, you know, when you go back to the
start when you go and see the bank, that's part of that assessment that
someone's making when they're talking to you, is this someone we really want to
be dealing with? So that's number one. 

The second one is capacity. So that is really your ability to be able to service your debt. So if you go back to the conversation we just had before about that year-in, year-out cash flow budget, given normal circumstances, can this business support the debt and have a buffer there so that when things don't go quite well, that you've actually got a buffer to go, so that's your second one. 

The third one is capital. So that's essentially how much capital have you got in your business, so your equity position. And you know, there's lots of argument about how much equity someone needs in a business and, you know, most banks will have a benchmark that they work on that'll be around a 55% or a 60% benchmark for a business. You know, you can argue equity is only a number written on a piece of paper, and that's probably a fair comment. But the reason a bank looks at it is how much fat have you got in your business? So when things don't quite go well, how much have you got to fall back on to? If someone's got a really strong equity position, then obviously it gives the bank some more comfort and you'll probably get some better pricing out of your bank as well. But if you've got lower equity, that isn't necessarily a bad thing, it just means that you need to structure your business to ensure that… you've got to be very profitable and improving that equity fairly quickly so that if something does come and bite you down the track that you're prepared for it. So that's a scenario where a bank might turn around and say, we really want to see you on P&I repayments, maintain your debt coming down because you've got low equity.

Your fourth one is collateral, so essentially the security that the bank holds. So at the end of the day, the majority of banks won't do unsecured lending – it's all got to be secured. So what's the collateral? What's available? You know, obviously your most secure asset from a collateral point of view is land but, you know, water titles – so if you've got unbundled water, your water titles – livestock and so forth are sort of the general ones from that perspective, but the best outcome from your bank is to have a really good land base as far as your security goes, and/or water, banks look at water pretty favourably too. So, yeah, look, that's probably an important one – at the end of the day, banks want to be comfortable that they're covered from a security point of view.

Sheena Carter:

Sure. Just on the livestock, how do you value livestock given, you know, the
ups and downs of the market?

Greg Kuchel:

With great difficulty.

Sheena Carter:

Yes, right.

Greg Kuchel:

It's a tough one. Look, at the end of the day, it's actually really hard to get
market data on the value of dairy cows. And I've personally tried to do this on
behalf of the bank to try and work out, well, what benchmark can we use for our
livestock values? And you've got this scenario where all the, probably, most
transparent, reportable public information is actually dairy cows that are
going to abattoirs, and that's actually unfair on a customer to say, well, your
cows that are worth $3,000 to another dairy farmer, we're going to value them
at $1,200 because that's what the abattoir is going to pay you for them. It's not
a big market, it's not a transparent market – the market that goes on between
dairy farmers – it's actually really hard to work that out. So there is a bit
of an element of, well, if the baseline is the abattoir value, well, then we've
probably got to find ourselves somewhere up here somewhere, and go from there.
So it's, you know, they talk about art and science, it's probably just as much
an art than it is a science, I think.

Sheena Carter:

Yeah.

Greg Kuchel:

And all banks grapple with that one, yeah.

Sheena Carter:

Yes, I can imagine. I can imagine. No, that's a good answer though. It depends.
It's one of those “it depends” answers.

Greg Kuchel:

That's exactly right. And the fifth one is conditions. And that really relates
to the industry that you're in so, you know, what are some of the seasonal
impacts you see within your industry? You know, where's the industry at in its
cycle? What's the pricing looking like? What's your input cost looking like? And
so forth.

So they're the five things that a banker will really look at and you don't have to tick all five boxes to be able to get a loan, if that makes sense. You've got to tick the character box, that's a given, you've got to tick that one. But the rest of them, if you've got lower equity but you've really got strong serviceability, then a lot of the time that will get you over the line. If you've got strong equity, strong security but your serviceability is a bit tight, well, a bank will probably say, well, look, we can stick you on interest only lending and so forth and you can continue on and go from there. You don't have to fit the box perfectly. No, yeah, and it's rare that someone does, at the end of the day, like most of the time there's usually some aspect of someone's business where you go, well, it's probably not as strong as it could be, but that's just the nature of farming and agriculture. So, yeah, but that's essentially how a banker, you know, in this simplistic way, basically how a bank views an application if you put one in.

Sheena Carter:

Okay, right. And so from all that, you'll come up with, yes, Sheena, we're
going to lend you the money to buy the property next door, and some of that
information from our 5Cs is used to generate a customer margin. Is that how you
term it?

Greg Kuchel:

Yep. So through that process that we go through, you come up with a client risk
rating. So that basically is a risk rating, and this is pretty standard across
the banks because we're so heavily regulated in regards to the way that we have
to do things. They do it slightly differently, but it's the same process, if
that makes sense. So there's ratings put on serviceability calculations,
there's a rating put on the security position, their equity position, the
industry they're in, and you magically can put it in a box and it spits out and
it'll give you a rating score. And that rating score will then drive the
pricing or the margin that the bank will charge you. So if someone's a stronger
rating, they'll get a lower margin, so a better lower rate. Someone that might
be a, you know, a lesser of a risk or will get a higher margin and pay a higher
rate so, you know, it's in the farmer's best interest to present their business
in the strongest position they can because that will get them the best outcome
as they can and, you know, it should also really reflect the fact that, you
know, if someone improves their business over the time and that risk rating
improves that that should be reflected in the pricing they receive as well.

Sheena Carter:

Yeah, good.

Greg Kuchel:

And most banks will review that.
Most people would be on an annual review process and they should, if that's the
case, and their pricing would get reviewed at that point in time as well.

Sheena Carter:                                                                                                                    That's all for today's episode of "The Business of Dairy." We hope you enjoyed diving into the fascinating world of dairy farming and industry insights.

As we continue to expand and evolve, we greatly appreciate your support. Our show is thriving, attracting new listeners each week. But we believe there's always room to grow, and we need your help to make it happen.

If you've found value in our discussions, we kindly ask you to take a moment to rate and leave a comment about the podcast on your preferred platform. Your feedback not only lets us know what you enjoy but also helps boost our visibility to others who might benefit from our content.

Remember, your ratings, comments, and shares are vital in spreading the word about "The Business of Dairy." Together, we can ensure that more people have access to the valuable insights and knowledge shared on our podcast.

I sincerely thank you for being part of our community, and we look forward to bringing you more engaging episodes in the future with the continued funding and support of the Hunter Local Land Services. Until next time, stay curious and keep milking those opportunities!