Latest / Dollars In The Dirt / #021 - What the RBA Rate Rises Mean For Farmers

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#021 - What the RBA Rate Rises Mean For Farmers · Dollars In The Dirt

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The single biggest mistake ag producers make when the RBA raises
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interest rates is waiting until their cash flow is tight to take action. Most
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people think that higher interest rates will send them broke. The truth
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is, it's poor cash flow management that kills a rural business,
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not the interest rate itself. After helping hundreds of producers secure
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over a billion dollars in finance, I can tell you that the best operators
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don't panic when rates go up, they restructure. So in this video, I'm
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giving you the exact four-step framework I
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use to see through the bank's tightening policies and find the
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loan structure that's actually going to protect your farm. Welcome
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to 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. The first thing you need to understand is that every single rate
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rise cuts directly into your net profit and cash flow
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surplus. On a substantial rural debt, even
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small changes can have a significant impact. Your
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borrowing capacity is reduced with every rate increase. With
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higher rates, loans are harder to get, and you need to make sure
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you're presenting a professional plan. Input costs are all
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rising, and often the largest cost is the interest rising.
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This means you need to be across your numbers. Forecasting is
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more important than ever. There is less fat in the system, so
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forecasting cash flow is absolutely critical. You have
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to know exactly where your break-even point is. I recently had
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a client with a $5 million facility. When rates were at
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2%, their interest bill was $100,000 a year. Rates have now hit 6% and the bills jumped to $300,000 a
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year. That's
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an extra $200,000 a year that has to come straight out
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of the net profit. If they hadn't forecasted that increase and built
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a buffer into their cash flow, they would have been forced to sell off their core breeding
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stock just to make the interest payments. You have to run the numbers on
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a 2% or 3% increase before it happens and not after it.
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And the next point is, will the banks become more conservative? And
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that leads us to the next point. Banks get more conservative in
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a rising interest rate cycle. Lending policies tighten, and
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there is more scrutiny on all aspects of the business. Funding approvals
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take longer, and more questions get asked. You also have
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to consider the potential downward pressure on land prices over time,
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as there's fewer buyers, and buyers can't access as much
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capital as before, and they need higher returns on their properties to
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justify the purchase. You have to be prepared for
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the bank to look at your application with a much more critical eye.
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They want to see that you have a plan for higher rates and
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not just hope that they'll go back down. When rates are low, banks
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are eager to lend. And when rates rise, their risk appetite
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shrinks dramatically. I've seen applications that have been approved
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in a week or two years ago now taking months with a bank demanding
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far more detailed cash flow projections, their stress testing everything
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a lot more, and they want to see how the business performs if commodity
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prices drop at the same time as interest rates peak. If you can't show
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them that scenario, they'll simply just say no, and you have to
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present a bulletproof case. Just quickly, if you're tired of
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explaining your operation to a new bank manager every year, only
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to get a one-size-fits-all deal that doesn't fit your business, we
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can help. At Season Finance, we do things differently. We've got over
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70 years of combined experience in agricultural lending, and we
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work for you, not the banks. We're the consistent expert team in
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your corner fighting to get the finance that actually helps you grow, purchase
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the next property and build your legacy. Don't leave money on the table. If
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you're looking at your next move or just want a second opinion on your current setup, click
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the link in the show notes to book a confidential, no obligation chat
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with the team and we'll show you what's possible. Righto guys, now back
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to the episode. The next point's around fixing or leaving your loans
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variable. Once you understand the bank's mindset, you have to
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look at the fixing versus variable rates. Farmers that locked
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in at low rates are winning now, but the fixed rates are currently a
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lot higher than the current variable rates. If you're fixed now, you're
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locking in rate rises today. Having a strategy around interest rates,
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a portion fixed and variable, works for people in
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tranches with different expiries. It's about managing the risk and
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not just guessing what the RBA will do next. You have to look at
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your own cash flow and decide how much certainty you need
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versus how much flexibility you want. I always tell my clients that
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fixing your rate is like buying insurance. You're paying a premium for
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certainty. If you have a massive debt load and a small cash
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flow buffer, you might need to fix a portion of your debt to guarantee
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you can make the payments, even if it costs you a little bit more in the short
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term. But if you have a strong cash flow and you want the flexibility to
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be able to pay down debt quickly or sell assets without a massive break fee,
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staying variable might be the better play. It's
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a strategic decision based on your specific risk profile and
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not a gamble on the market. Finally, don't wait until your cash flow
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is tight to take action. Look at refinancing to a better deal
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now. Consider interest only turns and extend them
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before the principal payments commence. Interest rates are
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like predicting if it's going to rain or not. Plan for the variability and
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have a strategy to manage it. Higher interest rates won't
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send you broke, but poor cash flow management absolutely will.
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If you're proactive, you can restructure your debt to handle the higher rates
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without sacrificing your core business. The
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worst time to ask the bank for help is when you desperately need
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it. And if you wait until your account is overdrawn and you're missing payments,
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the banks hold all the cards. But if you approach them six
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months before you get tired with a clear plan and request to
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restructure your facilities to interest only or extend your loan
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term, you're in a position of strength. You're showing them that
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you're managing your business proactively. And that is the difference between
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surviving a high interest rate environment and being crushed by
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it. Remember guys, don't let the RBA dictate your
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farm's future. Get your structure right, forecast your
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cash flow, and manage the risk. If you need help reviewing your
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current loan structure to make sure you have the flexibility that
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you need, reach out to Season Finance and we can do
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the heavy lifting for you. Thanks guys and look forward to seeing you in the
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next episode. Thanks for tuning in to Dollars in the Dirt. If you've got
6:08
value from today's episode, make sure to subscribe so you never
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miss the insights you need to grow your business. And if you're ready to stop being just
6:15
another number to the banks, visit Season Finance via
6:18
the link in the show notes. Remember to follow us on socials and catch