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#010 - Explaining Farming Loans Like You’re 5 Years Old · Dollars In The Dirt

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  LVR, serviceability, ad backs, security, covenants, farm
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  loans are too complex. The world of farm finance is
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  deliberately complicated. It's full of jargon designed to
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  make you feel like you're not smart enough to understand it. But
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  that's nonsense. And today, we're going to prove it. Forget
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  everything you think you know about banking. In this episode, I'm
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  going to explain farm loans like you're a five-year-old. No jargon,
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  no complex formulas, just the simple core principles
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  of how a bank decides to give you money. We're going to
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  break it down into three simple parts. What
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  you own, what you earn, and who you are. By the
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  end of this episode, you'll understand farm finance better than
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  90% of the farmers out there. And you'll finally get to see that it's
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  not as complicated as everyone wants you to believe. Welcome to
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  Dollars in the Dirt. I'm Brecon Curtis, and this is where we break down
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  the finance side of farming so you can grow your operation, buy
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  that next property, and build real wealth. Let's get into
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  it. All right. Let's imagine you want to borrow some money from your friend.
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  What's the first thing they'd want to know? They'd want to know if you're good
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  for it. They'd want to know if you're going to pay them back. And a
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  bank's no different. They're just a very, very cautious friend
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  with a lot of rules. All those rules boil down to three
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  simple questions. And let's call them three buckets. The
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  first bucket, it's what you own. This is what the bank calls security.
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  Imagine you want to borrow money to buy a new toy. Your
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  mum might say, OK, but what are you going to do if you don't pay me
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  back? I'm taking your favourite teddy bear. And that's what
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  the bank is using as security. It's something of value that
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  you promise to give them if you can't pay them back. A
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  farm loan and your teddy bear, well, it's similar. It's
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  the main thing the bank is interested. They want to know what it's worth and
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  to find out what it's worth, they get what's called a valuation. They'll send
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  an expert out to have a look at your property and understand what the
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  market value is of that property. They then decide how much they're
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  going to lend you against that property and that's what we call the
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  loan to valuation ratio or LVR for short terms. If
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  your farm's worth a million for round figures and the bank has a 60% LVR
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  policy, that means they'll lend you a maximum of $600,000 against
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  that property. It's really interesting to understand the different
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  LVR policies amongst different banks and different asset classes and
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  different locations also have an impact on the bank's policy for
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  different LVRs. For example, a lot of the major banks will
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  do 70% LVR on agricultural land. Some
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  of them also do 60%. And interesting enough, one of the major
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  agricultural banks only do 50% LVR on agricultural land.
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  So depending on the value of your property and whether
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  your debt level fits within your different bank's policies depends
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  on whether you're going to be successful with different lenders. So it's really
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  important that you work with someone that has access to all the
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  different banks. to make sure that your scenario is
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  matched with the right policy for the right bank because there'll
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  be no good going to a bank that's got a 50% LVR policy when
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  you need to borrow up to 70% to buy the property next door. That
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  bank's just not gonna be able to assist you. So you're gonna have to go and find a bank that
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  is actually able to assist you in that circumstance. So
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  the first and most simple part of getting a loan is having something of
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  value that the bank can use as security. The more valuable the land,
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  the more you can potentially borrow. Bucket number two, it's
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  what you earn. And this is what the bank calls serviceability. It's
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  not just enough to have a valuable teddy bear. Your mum
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  will also want to know if you've got enough pocket money coming in to
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  be able to pay the interest on having that teddy bear and if you
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  can actually afford the teddy bear. And for a farm, your pocket money
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  is your profit. It's the money that you make from selling your cattle, your crops,
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  minus all your expenses like your fuel, your wages,
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  your fertilizer bills. And the bank wants to see if
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  you have enough profit left over at the end of the year to be able
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  to comfortably make the loan repayments. But here's the tricky part. The
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  bank just doesn't look at the profit, they also look at your commitments. Do
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  you have a car loan? Do you have a credit card? Do you have kids in
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  boarding school? All of these things reduce the
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  amount of pocket money you have available to pay back your loan. So
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  the bank does a simple sum. They take your farm profit, and
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  then they add back the non-cash items like depreciation, and
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  we'll talk about that in another episode. And then they subtract all
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  your other loan repayments, your personal living expenses, and
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  the number that's left is what's called the surplus. And the surplus needs
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  to be big enough to cover the new loan repayments with
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  a healthy buffer on top. So the second part of getting a loan is
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  proving that you have enough money to comfortably afford the
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  repayments even if things get a bit tough. When
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  it comes to capacity, it's really important that you understand your capacity and
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  what actually drives a bank servicing analysis of
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  your capacity. Some banks will consider cash flow
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  forecasts which by looking in the rear vision mirror at your financial
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  statements may not paint a very good picture of what your business
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  would look like if you did buy that property or buy some more cattle or put in
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  that crop. By understanding what drives serviceability in a
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  bank's policy, it's important that you have that mapped
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  out and able to be presented to a bank in a way
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  that they can understand and make an assessment of
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  your position based on the business moving forward and how
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  that looks, not focusing on your financial statements and your historical performance.
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  One secret guys that people often forget about in the
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  capacity section is equipment finance payments. So
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  having multiple equipment finance payments often add up and
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  they impact people's ability to be able to service debt. So,
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  you know, having a new tractor or, you know, new cars and that sort of
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  thing. It's all great, but then when you want to go and buy a new
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  property next door, all these payments all add up and they all. get
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  taken into account in your servicing capacity. So being aware
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  that buying a new car might have a detrimental impact
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  on buying the property next door. It's just understanding all
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  those different repayments. You might think it's only $1,000 a month,
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  but if you've got three or four of them, before you know it, it's $4,000 or
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  $5,000 a month. And that adds up over time and also reduces
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  your borrowing capacity. Just quickly, if you're tired of explaining your operation
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  to a new bank manager every year, only to get a one-size-fits-all deal
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  that doesn't fit your business, we can help. At Season Finance, we
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  do things differently. We've got over 70 years of combined experience
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  in agricultural lending, and we work for you, not the banks. We're
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  the consistent expert team in your corner, fighting to get the finance
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  that actually helps you grow, purchase the next property, and
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  build your legacy. Don't leave money on the table. If you're looking at your
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  next move or just want a second opinion on your current setup, Click the link
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  in the show notes to book a confidential, no obligation chat with
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  the team and we'll show you what's possible. Righto guys, now back to
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  the episode. Bucket number three, well, this is what the bank calls character.
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  This is who you are and probably the most important bucket of
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  all. It's the one that people often forget about. Your mom just
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  isn't looking at your teddy bear and your pocket money. She's looking at
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  you. She's looking at you to say, are you a good kid? Do
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  you keep your promises? And do you pay back your loans in the past? The
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  bank's exactly the same. They want to know if you're a trustworthy person.
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  They look at your history. They look at your credit checks, your missed loan
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  repayments. Do you pay your bills on time? Do you have a good credit
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  score? They also look at your experience. How long you've been a farmer for?
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  Do you have a good track record of running a profitable business? And
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  do you have a clear plan for the future? They look at how you
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  present yourself. Is your paperwork neat and tidy? Are your numbers accurate?
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  Do you come across professional and an organized person? Or
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  are you a messy and disorganized? If you have a great teddy bear,
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  lots of pocket money, and your mom thinks you're a bit of a rascal who
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  doesn't keep their promises, she's probably not going to
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  lend you the money. A bank's no different. They want
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  to lend money to good, reliable people who
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  do what they say they're going to do. Guys, this one is hard to measure. There's
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  no metrics around character. It's your personal reputation that's
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  being assessed here. Often a bank manager will do some background digging
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  on a person. They will talk to different people, try
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  and find out about someone if they don't know them. So it's really important
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  that you understand that has a big impact on your borrowing ability is
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  your personal reputation and what that means for a bank and
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  making sure that you pay back your loans and that you're a good customer for
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  a bank. So let's recap. It's that simple. To
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  get a farm loan, you need to satisfy the bank in three
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  areas. What you own. You need to have valuable assets
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  like land to use as security. What you earn. You
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  have to have enough profit to comfortably make the repayments. And
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  finally, who you are. You need to be trustworthy, experienced, and a
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  professional person. And that's it. That's the whole game. All
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  the jargon, all the complicated forms, all the meetings,
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  it all comes back to these three simple buckets. So the next
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  time you're thinking about applying for a loan, don't get bogged down
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  in the complexity. Just ask yourself these three questions. Am
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  I strong in all three buckets? And if not, which one do
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  I need to work on? Because when you understand the game, you
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  can start to win. Thanks for tuning in to Dollars in the Dirt. If
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  you've got value from today's episode, make sure to subscribe so
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  you never miss the insights you need to grow your business. And if you're ready to stop
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  being just another number to the banks, visit Season Finance via
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  the link in the show notes. Remember to follow us on socials and catch