Kieran Coughlan: Keeping tabs on credit costs is key to profits

This is an expensive time of year on many farms with heavy feed and fertiliser bills for sheep, cattle and dairy farmers, and seed, diesel and fertiliser bills for tillage farmers.
Kieran Coughlan: Keeping tabs on credit costs is key to profits

Farmers rely heavily on merchant credit at this time of year as cashflow is generally under pressure.

Later in the year as animals are sold, milk production kicks into full swing and crops are harvested many of the bills will be cleared down.

Similarly farmers typically use the single farm payment receipts to pay off their tax bills and to clear contractor costs.

Given the year at hand and the expected environment of tighter margins, farmers should look at their spending patterns and examine whether there is scope for greater financial efficiency.

Merchant credit can be particularly expensive, and in some cases interest charges of up to 1% are being charged on outstanding balances.

Where interest is compounded, the actual cost to the farmer is significantly higher than a simple 12% being 12 months at 1%. Comparatively approved business overdraft facilities are generally a lower rate usually around 9%.

One benefit of purchasing on overdraft is that interest is only paid to the extent that your account balance is overdrawn, whereas with merchant credit, the interest charges can apply on the full balance even though a farmer may have some positive funds within his current account. Some banks offer stocking loans, harvest and agri credit lines.

These can offer a much cheaper form of finance with rates at less than 5%.

Using these facilities will benefit farmers most where a farmer has been careful to repay facilities with surplus positive cash available in the farm current account, and drawing down extra funding as the current account comes under pressure.

The savings in interest charges between switching from expensive merchant credit to cost effective seasonal borrowing can be very substantial and in some cases thousands of euro can be saved.

However, farmers should be careful to remember that ‘seasonal’ loans are seasonal meaning that financial institutions will usually insist on repayments within the predefined time periods or heavy surcharge interest rates can apply.

Similarly many current account facilities offer their lower headline rates but conditional that your account must be in credit for a certain number of days in a year, for example, 30 days.

Where farmers are relying on an overdraft, they should ensure their spending is within their limits, this can avoid embarrassment and hassle of bounced cheques, breaches of your credit limit may also be recorded on your credit history and result in extra charges and could affect the ability to secure new loans and facilities.

When it comes to merchant credit, farmers are good at negotiating off the interest charges leading some of us into a false sense of security that we have managed to secure free credit. The reality is that merchants often factor this into their costings, with better deals available for farmers who pay on the day.

Meanwhile the cost of credit for Irish farmers shows no major improvement despite record low ECB lending rates of just 0.3%.

The average SME lending rate to Ireland remains at close to 6% for any business lending of less than €250,000. The amount of funding lent to farmers has also flat-lined, with the majority of farmers reluctant to consider taking on expensive borrowings.

Recent figures from the Irish Central Bank, 2015H2 report, shows that Ireland is being left behind by comparison to our fellow EU neighbours in the premier league referred to as EU1 (Austria, Belgium, Germany, Finland, The Netherlands and France ), who have been able to secure credit at near half the cost of that paid by Irish SMEs.

Meanwhile for the PIGS (Portugal, Italy, Greece and Spain) the average lending rates have declined steadily from over 6% in 2012 to about 4% in 2016 for lending facilities of less than €250,000.

Our stubbornly high interest rates of 6% represents a market failure for farmers who in comparison to other industries have low borrowings, high collateral and a traditionally strong record of meeting repayments.

It’s clear by comparison to our EU neighbours that lending to farmers is hugely profitable for our domestic banks.

Farm organisations, and the soon-to-be elected public representatives would do well to bring greater competitive forces together for farmers.

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