Latest / Dollars In The Dirt / #016 - How to Actually Compare Farm Loan Options (Step by Step)

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#016 - How to Actually Compare Farm Loan Options (Step by Step) · Dollars In The Dirt

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  The single biggest mistake farmers make when comparing loans is
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  focusing only on the interest rate. Most people think comparing
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  loans is about finding the lowest number. The truth is, it's
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  about finding the right structure. After helping hundreds of farmers secure
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  over a billion dollars in finance, I can tell you the best deal
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  is rarely the one with the lowest advertised rate. So in
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  this video, I'm going to give you the exact seven-step framework I
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  use to find the loan that's actually the cheapest and the best for
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  your farm. Starting with the first thing you need to look at, and that's the
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  upfront costs. These are the costs that you pay before the loan even starts,
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  and they can vary widely between banks. We're talking
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  about the application fees, the legals, the documentation fees
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  and the settlement fees. These can range from a few hundred dollars
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  to several thousand and two loans with the exact same
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  interest rate can have a five to ten thousand dollar difference in set
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  up costs alone. Some lenders will advertise a
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  super low rate, but they make their money back by charging a massive application
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  fee. And this is a classic trick. So the first step
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  is to ask the bank for a full breakdown of all the establishment costs.
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  Let's get in writing, ask them if any of these costs are capitalised into
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  the loan, meaning you're paying interest on them, and whether
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  they're refundable if the deal doesn't go through. And don't get caught
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  out before you've even started. The next thing we need to consider is
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  the valuation. A rural valuation is not like a residential one
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  where someone just drives past the house. It's a full-blown financial
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  assessment of your property. It's your business, they're
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  looking at the land, your water rights, infrastructure, your production
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  history, everything. And because they're so complex, they're expensive.
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  A typical rural valuation can cost anywhere between $2,000 or $10,000. And
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  this is a huge variable between lenders. Some banks will subsidise
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  the cost of the valuation. Some might even complete it internally.
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  Some will require multiple valuations from different firms. Some
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  will even require you to get it updated every few years at
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  your own expense. And this can add thousands to the real cost
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  alone. So you must ask your bank about their valuation policy
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  and who pays for it, how often it's required, and
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  how you can use a valuation, and how you can use a valuation you've
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  already paid for. The answer to this can save you a lot of
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  money. All right, now let's get into one that everyone focuses on,
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  and that's the interest rate. And yes, it matters, but you have to
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  look beyond the headline number. You need to ask if the rate is
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  a variable or fixed. Is it an introductory or
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  honeymoon rate that will jump up after 12 months? How often
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  does the bank review the rate? And does the rate include a margin based
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  on the loan-to-value ratio? For example, a
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  bank might offer you a lower rate with much tighter terms and
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  conditions, and another bank might be 0.2% more expensive,
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  but they offer you the flexibility to make extra payments, redraw funds
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  when you need them. Sometimes paying a little bit
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  more for the flexibility can save your business in a tough
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  season. Be sure not to just ask for the rate, but
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  for the full context around it. Understand the trade-offs between a
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  low rate and flexibility that you might need down the track.
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  The next one's a silent killer, and that's the line fee. Many rural loans
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  are set up as lines of credit or overdrafts, and
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  the bank charges you a fee for the total approved limit. whether
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  you use it or not. You're paying for access to the capital, not
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  just the money you've got drawn down. A typical line fee is anywhere
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  between 0.1% to 0.5% per year. So
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  let's run the numbers on this. If you had a $2 million facility with a
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  0.25% line fee, that's an extra $5,000 a year
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  you're paying, regardless of whether you use the dollar of
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  that loan or not. It's pure profit for the bank. So make sure you're
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  always asking, is there a line fee? And do the maths. A
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  loan with no line fee but a slightly higher interest
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  rate can often work out to be a much cheaper option for you. And
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  that brings us to the line fees evil twin, the unused limit fee.
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  This is another fee that's often overlooked and it's charged on the portion
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  of the loan limit that you're not using. It's common with working capital
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  facilities or seasonal lending where you might not need the full limit
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  for the entire year. For example, let's say you
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  have a $1 million working capital facility, but you only
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  use $400,000 of it for most of the year. That leaves $600,000 sitting
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  there unused. If the bank's charging you 0.5% unused limit
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  fee, that's an extra $3,000 a year in fees. It's
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  a penalty for being prudent. When evaluating options, look
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  at your cash flow and be realistic about how much you'll actually use.
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  If you don't need a full limit, don't pay for it. Ask the bank if
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  they can charge an unused limit fee, and if they do, consider reducing
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  the limit. An unused limit fee can add up over time
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  and add a lot of cost to your facility. Now the
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  next point is sometimes more important than the cost. The
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  flexibility of the loan. Farming income isn't like your monthly
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  salary. It's lumpy, it's seasonal. You might only get
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  paid once or twice a year when you sell your cattle or your crop. So
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  a loan with a rigid monthly repayment can put a
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  huge strain on your cash flow. A good farm loan should
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  be structured around the rhythm of your farm. You need to look at the features like
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  the ability to redraw funds if you need them, seasonal repayment options,
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  that match your income cycles and the ability to make
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  interest only payments during tough periods and the
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  freedom to pay your loan off early without massive penalties. A
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  loan that looks cheaper on paper but locks you into a rigid structure
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  can be a nightmare. There is a lot of nuances to
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  this step and it's one you don't want to get wrong. If
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  you'd like some help securing the best loan based on your circumstances, you
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  can book a free consultation via the link in the description below. And that
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  brings us to the final and most important step. It's putting it all together
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  to calculate your total cost of credit. This is
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  where we add up everything we've talked about. Your upfront costs, the valuation
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  costs, your interest repayments, over the life of the loan, loan fees
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  and other fees. This is the only number that matters and this is how you
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  compare apples with apples. As a broker, This
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  is what we do for my clients. I take the offers from different banks,
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  I model them out over the full term of the loan to see what the true cost
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  is. And 9 times out of 10, the loan with the
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  lowest headline interest rate is not the cheapest option. Create
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  a simple spreadsheet, plug in all the numbers and calculate the total
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  cost over 5 or 10 years. and that's how you make a smart, informed
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  decision. So there you have it, the seven-step framework for
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  actually comparing your farm loan options. It's not just about the
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  interest rate, it's about the upfront costs, valuation fees, line
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  fees, the flexibility, and your total cost of credit. If
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  you go through these seven steps, you'll be in a position of power. You'll be able
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  to see through the bank's marketing and make a decision that's
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  right for your business. And if you want a hand with this, if
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  you want someone to do the heavy lifting for you and create a competitive environment
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  where the banks have to fight for your business, that's what Season Finance
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  is best at. We know the questions to ask, we know where
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  the hidden fees are, and we know how to get you the
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  best deal. So if you'd like our help, book a free consultation using
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  the link in the show notes. And remember guys, don't get
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  caught in the interest rate trap. Look at the whole picture. Thanks for tuning
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  in to Dollars in the Dirt. If you've got value from today's episode, make
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  sure to subscribe so you never miss the insights you need to grow your business.
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  And if you're ready to stop being just another number to the banks, visit
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  Season Finance via the link in the show notes. Remember to follow