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#025 - How to Read a Bank Term Sheet (And Spot the Hidden Traps) · Dollars In The Dirt

• 0:00
  The single biggest mistake producers make when reading a bank term sheet
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  is focusing only on the interest rate. It's a trap the banks
• 0:07
  set and it cost producers a fortune. That low
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  headline rate hides thousands in fees and a loan structure
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  that can cripple your cash flow when you need it most. Most people think
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  comparing loans is about finding the lowest number. The
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  truth is it's about finding the right structure. After
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  helping hundreds of farmers secure over a billion dollars in finance,
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  I can tell you that the best deal is really the one with the lowest advertised
• 0:33
  rate. So in this video, I'm going to give you an
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  exact five-step framework I use to see through the
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  bank's jargon. and stop the hidden traps in your term
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  sheet. Welcome to Dollars in the Dirt. I'm Brecon Curtis and
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  this is where we break down the finance side of farming so you can grow
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  your operation, buy that next property and build real wealth.
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  Let's get into it. The first thing you need to understand is that the interest rate
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  is just the bait and you have to look at how the rate is actually made
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  up. Is it priced off BBSY? or on a bank
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  base rate that can change without notifying you. You
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  also need to check all the hidden fees. The establishment fee
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  is obvious. But what about the ongoing fees? A 0.25% line fee
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  on a $2 million facility equates to $5,000 a year, every year. And
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  what about the unused limit fee? If you have a $500,000 overdraft and
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  you're only using $100,000, you're paying a fee on the other
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  $400,000 that you're not even touching. It's pure profit for
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  the bank and you have to calculate this cost of credit and
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  not just the interest rate. I recently had a client who was thrilled because
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  they negotiated a rate that was 0.1% lower than their
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  current bank. But when I looked at the term sheet, the bank
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  had slipped in a 0.5% line fee on their entire $3 million
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  facility. And that's $15,000 a year in fees just
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  for having the facility open, regardless of how much they
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  use. The 0.1% interest saving was completely wiped
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  out and they were actually going backwards by $12,000 a year. And
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  if you don't calculate the total cost of credit, including every
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  single fee, you're actually flying blind. rose
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  suddenly and obviously the bank made more money because
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  across their whole portfolio the interest rate went up and more interest was being
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  charged to their whole portfolio of clients where a BBSY price
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  product is very transparent. We can see what BBSY is every
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  day. And then we have a client margin that's fixed over the
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  top of BBSY, so there's no indiscrepancy around
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  what the base rate is and how the interest rate is actually made up. So
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  when we look at all our clients, we try to make sure we're priced off BBSY, so
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  there's complete transparency around the client's interest
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  rate and that there's no Hidden cost gets built into an
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  interest rate over time, and that's how rate creep occurs, is that
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  the base rates increase over time. I worked for a bank
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  where they brought out a new base rate for
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  new customers, and their older clients were on the base rate that they
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  put higher margin into. They were pricing all
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  their new customers on a new base rate that was lower, and then they had all their back book
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  on a higher rate. That's a common thing that's happened in the past with banks,
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  and it's something to look out for. If you weren't in
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  the industry or understanding what was happening, it's pretty easy to
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  overlook and get caught out with paying higher interest just that
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  it's creeped up on you without you actually realising. And
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  that leads us to the next point around the security. What is the bank
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  actually taking as security for the loan? The truth is
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  the bank will take as much security as they can and
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  they'll always try and take more than they need. You have to be ruthless about
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  this when you're negotiating with them. They're going to cross-collateralise everything
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  you own. If they are, You are
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  handing over complete control of your assets for no good reason.
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  You want to limit the security to only what is necessary to
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  secure the loan. I see this all the time. A
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  family wants to buy a new block of land and the bank asks for
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  a mortgage over the new block, plus a mortgage over the home farm, plus
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  a general security agreement over all the livestock and machinery. Now
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  essentially tying up 10 million assets to secure a $2 million loan.
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  If you ever want to sell a piece of machinery or refinance a portion of
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  your debt, you have to go back to the bank and ask for their permission. As
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  a broker, my job is to push back and say no. The
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  new block A 60% LVR on the home
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  farm is more than enough security and you have to protect
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  your equity. Recently we had a client that came to us and
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  they had three rural properties tied into their loan.
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  The value of these properties was substantial and their debt was quite,
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  it was a low LVR for where they were at. So the
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  bank you know, had mortgages over three properties, we were able
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  to negotiate with the bank, with a new financier, to
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  be able to release one of those properties to security. So effectively, the
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  client had two rural properties secured against their loan, and they had
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  one property that had no mortgage over it at all, and they were able to
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  keep their security mix. It's just The bank had those
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  three mortgages because the customers thought
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  that what the bank was asking for was what was required when
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  actually the bank was just taking more security than what was needed. The
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  interest rate being offered wasn't going to be any better if there was two or
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  three properties. There's no point leaving that property in
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  the security mix if it's not required, and it's
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  better for the customer to leave that out. And obviously the banks
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  want to take as much security because it makes their position look a lot
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  better, but it's not actually the best thing for the customer. So
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  that customer's able to come to us, we negotiate that on behalf, and here they are
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  now with one rural property fully unencumbered and only using
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  the two the two properties to secure their loan. Just quickly, if
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  you're tired of explaining your operation to a new bank manager every year only
• 6:01
  to get a one-size-fits-all deal that doesn't fit your business, we
• 6:04
  can help. At Season Finance, we do things differently. We've got over
• 6:08
  70 years of combined experience in agricultural lending and we
• 6:11
  work for you, not the banks. We're the consistent expert team in
• 6:15
  your corner fighting to get the finance that actually helps you grow, purchase
• 6:19
  the next property and build your legacy. Don't leave money on the table. If
• 6:22
  you're looking at your next move or just want a second opinion on your current setup, click
• 6:26
  the link in the show notes to book a confidential, no obligation chat
• 6:29
  with the team and we'll show you what's possible. Righto guys, now back
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  to the episode. Once you have the security sorted, you have to look at
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  the covenants. These are the rules you have to play by
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  and this is where you can get caught out unexpectedly. What
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  is the debt to income ratio they're demanding? And
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  what is the interest cover? What is the maximum LVR? And
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  here's the big one. Are you allowed to borrow money from another
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  lender without their consent? If the covenants are
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  too tight, there's no buffer for a bad season. You're
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  setting yourself up to fail. You need to negotiate covenants that
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  give you room to breathe. Imagine signing a term
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  sheet that requires you to maintain an interest coverage ratio
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  of 2.5 times. That means your net profit has
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  to be 2.5 times your interest bill every single year.
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  If you have a drought year, your profit drops. You're technically in
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  breach of your loan covenant, even if you never missed a payment. The
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  bank can step in, demand immediate repayment, or force
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  you to sell assets. You have to negotiate covenants that
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  reflect the reality of farming. and there
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  will be good years and there'll be bad years and you need a buffer. Finally,
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  you have to look at the review periods. How often will
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  there be a review of your facilities and what is required for
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  that review? Are there short review periods that
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  give the bank the power to call in the loan if you have a bad year? And
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  what about revaluations? Who's going to pay for them? If
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  the bank decides your property is worth less and you have to pay for
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  the valuation to prove it, you're losing twice. You
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  want a long review period and clear terms on when revaluation is
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  required. I always push for annual reviews to be based
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  purely on the provision of financial statements, not a full
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  revaluation of the property. If the bank insists on
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  a revaluation every three years, I negotiate that
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  they pay for it, not the client. A full valuation can
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  cost between $10,000 and $20,000 and if you're paying for that
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  every few years, just to keep the loan open, that's a
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  massive hidden cost. You have to read the fine print on the review
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  clauses. I recently had an example of a customer that was caught out
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  by the not being allowed to borrow any money off another financier
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  covenant. That covenant was slipped into their letter
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  of offer when they refinanced to a new bank and
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  then they went and actually went and got some livestock funding. The bank didn't
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  actually, they didn't actually know that that covenant was in their loan documents
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  and then the bank actually issued them a breach of covenant notice
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  based on getting some livestock funding. So it's really important that
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  you understand those conditions that are placed into the loan documents
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  and making sure that You read those, and the bank manager, if
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  you're dealing directly with the bank, really outlines what those conditions mean, or
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  if you're with a broker, make sure they're across the conditions and the covenants of
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  your loan. So it's easy to get caught out, and I've seen it
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  happen time and time again, where people get caught with not
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  understanding or not realising that there's covenants that have been stuck into their loan
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  contracts. And it's hard to negotiate away from that when
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  there's an actual breach in place. So remember guys, don't get caught
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  up in the interest rate trap. Look at the whole picture. Vague wording,
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  tight covenants and cross-collateralisation are
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  the silent killers of farm finance. And if you need help
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  interpreting the bank jargon, negotiating better margins or
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  spotting the traps in your term sheet, reach out to Season Finance. As
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  a broker, this is exactly what I do for my clients. Thanks