Latest / Dollars In The Dirt / #036 - What Ag Debt/Finance Structures Should Look Like At $1M, $5M and $15M

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#036 - What Ag Debt/Finance Structures Should Look Like At $1M, $5M and $15M · Dollars In The Dirt

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  What should your finance structure actually look like when you owe the bank 1 million, 5 million or
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  15 million? Most producers think that as their debt grows, they just need a bigger version of the
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  same loan structure. The truth is, the structure that gets you your first block will actively
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  choke your business when you try to buy the second or third. After helping hundreds of farmers
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  secure over $1 billion in finance, I can tell you that the best operators completely rebuild the
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  debt structure at every major stage of scale. So in this video, I'm going to break down exactly
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  what your agriculture finance structure should look like at 1 million, 5,000,050 million. And the
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  specific traps to avoid at each level. So let's start at $1 million mark. This is typically the
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  acquisition of your first property. At this stage the structure is heavily reliant on our family
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  income. The income being generated off the rural property itself is rarely significant enough to
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  service the debt on its own, and there are often small scale operations, sometimes run more as a
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  serious hobby or a stepping stone rather than a self-sustaining enterprise. For example, you might
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  be a young couple buying a half section of grazing land somewhere in southern New South
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  Wales, running a couple of hundred sheep or a small herd of cattle while you maintain your full
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  time jobs in town. Or you could be a family purchasing a lifestyle block in northern Victoria,
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  hoping to eventually transition into full time farming. In either case, the property itself
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  doesn't generate enough consistent cash flow to cover the repayments. Because of this, the bank
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  will almost entirely rely on your off farm income, your salary, or your spouse's salary to
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  demonstrate debt servicing capacity. The loan structure here looks very similar to a standard
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  residential or commercial investment loan. You're likely to have a principal and interest term loan.
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  The bank will be heavily focussed on your personal living expenses and your PAYG payslips,
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  and banks want to see stable regular income, and if you're on a casual or seasonal contract, it can
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  be a real hurdle. And some banks might even ask for a high deposit or additional security if your
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  off farm income isn't rock solid, and this can delay the process. The trap at this level is that
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  this segment can often be the hardest to navigate from a bank and broker's perspective. A $1 million
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  rural loan can often take the exam paperwork to process as a $15 million loan, and the banks are
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  cautious because the agricultural income is unproven and they don't have the same confidence
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  that the property will perform consistently. I remember a client who was trying to buy their
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  first cattle property for just under $1 million near Roma in Queensland, and even though they had
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  a steady farm income, the bank was hesitant because the property had a history of drought and
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  variable carrying capacity. We had to prepare a detailed cash flow forecast and bring in
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  independent consultants to prove the viability, and it was a long process, but we got there. The
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  key here is to ensure that the loan term is long enough so that the principal repayments don't
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  strangle your personal cash flow, allowing you to actually invest some money into improving the
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  property. For example, if you're stuck with a 10 or 15 year principal and interest loan, your
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  repayments will be sky high and you won't have any spare cash flow for fencing, water
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  infrastructure, or even cattle purchases. So stretching the line out over a 25 or even 30 year
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  Period can reduce the repayments, giving you the breathing room to invest in the improvements that
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  will increase the property's productivity and value over time. This also helps protect your off
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  farm income from being entirely eaten up by your loan repayments, which is crucial in the early
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  years when the property isn't yet self-sustaining. Now let's look at a $5 million mark. This is
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  usually where buying your second property, and you're starting to build genuine scale in your
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  real business. At this stage, the dynamic shifts completely. There's much less reliance on off farm
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  income, and you're likely working in the properties full time. You've paid down some debt
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  from the initial property, and hopefully that has been further compounded by some capital growth in
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  the land value. Using equity from property A to secure property B and, you know, for example, I had
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  a client I work with in central Queensland and bought the first thousand hectare grazing block
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  five years earlier after improving the carrying capacity, building the strong herd. Um, the land
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  value had increased by about 30%. We leveraged that equity to help them purchase a second 1500
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  hectare property nearby. Double their scale. And this type of strategic leveraging of equity
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  is fundamental at the $5 million level. The structure here needs to separate your core land
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  out from your working capital. You should have an interest only term facility for the land
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  acquisition and a separate dedicated livestock or working capital facility. It's critically
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  important to have stock numbers build up so you can stock the new purchase as much as possible
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  from day one. If you use all your cash to buy the land and have nothing left to buy the cattle,
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  you're $5 million assets, effectively generating no income. I've seen this trap catch out a few
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  operators buying a big block, but then having the lease in stock at higher rates or leaving the
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  land on stock which it just killed their cash flow. This is a highly competitive segment of the
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  market, and all the banks are keen to operate in this space because by this stage you've proven
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  management ability. You've got strong equity. And the the trap here is staying loyal to your first
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  bank. If you if they want to offer you an interest only term or flexible working capital facility.
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  You've got the power to negotiate hard at this level, and your broker should be leveraging
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  multiple lenders to get you the best structure. A recent example I had a client we helped in
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  northern New South Wales. He was locked in with a traditional principal interest loan from the
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  first Bank. We shot this around and another lender was able to offer an interest only term for three
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  years for the land, plus a flexible overdraft facility for their livestock purchase. And just by
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  restructuring this loan significantly improved their cash flow position and gave them the
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  ability to grow as you scale from 1 million to 15 million. The way you handle equipment finance
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  needs to radically change. Also, at the $1 million mark, producers often make the mistake of rolling
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  their tractor or vehicle purchases into their core property loan, and that seems easy. The
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  interest rate on the property loan is lower than the standard equipment finance rate, so they think
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  they're saving money, but they're actually amortising a depreciating asset over 30 years. You
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  pay for that tractor up to three times over. If you're tied up in the valuable equity that should
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  be used for buying more land. I can recall a client recently who finds a $150,000 tractor by
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  adding it to their $900,000 property loan, and they didn't realise until years later that the
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  effective interest paid on that tractor was much higher than if they'd taken out a separate
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  equipment finance loan. So by the time you hit the $5 million mark and the $15 million mark,
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  Equipment Finance needs to be completely separated from your core debt, and you should be
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  using a dedicated chattel mortgage or equipment lease. These facilities are secured only by the
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  asset itself, leaving your property equity completely unencumbered. And more importantly,
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  separating your equipment. Finance aligns the debt with the useful life of the asset. You pay off the
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  tractor over five years while it's actually generating revenue for your business. It also
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  provides significant tax advantages allowing your accountant to manage depreciation schedules
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  effectively. A good broker will work to establish a master finance limit for your business, giving
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  you a pre-approved limit so you can upgrade and machinery quickly without having to go through
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  the full approval process and submit applications every time you need a new piece. This kind of
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  facility is a game changer for mid scale producers who need to stay nimble, replacing
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  equipment as needed without tying up capital going through the lengthy approval process each
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  time. So if you're sitting at that $1 million or $5 million mark and you're looking to expand, but
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  you're not sure if your current loan structure will support the next purchase, that's exactly
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  what I can help with. Book a free call with me or my team and we'll review your setup. Finally, let's
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  look at the $15 million mark. This is where you own 3 or 4 properties and the economies of scale
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  really build into your business. At this stage, there's absolutely no reliance on off farm income.
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  The business is standalone corporate entity. The financial management of the business needs to be
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  incredibly sophisticated. You're no longer just a farmer. You're effectively a CEO of a
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  multi-million dollar business. The structures here are highly customised. You're likely to have a mix
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  of core debt on long term, interest only facilities, equipment finance lines for your
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  machinery fleet, and a massive flexible trade facility for your livestock. and an example of
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  this. I had a large cattle operator in central Queensland that I've been working with. They had
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  four separate properties under management, and they had a $10 million term loan split into
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  trenches of varying fixed rate facilities. They had $1 million chattel mortgage facility for
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  their machinery, and a $3 million revolving trade facility to manage their livestock sales and
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  purchases. The banks no longer just looking at their equity. They're deeply focussed on their
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  interest coverage ratio. Your management team and your risk mitigation strategies, such as forward
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  contracts and off farm investments. And at this scale, lenders want to see a detailed budget, cash
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  flow projections and evidence of professional management practices, and they'll also scrutinise
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  your exposure to commodity price fluctuations and climatic risks. For instance, some banks expect you
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  to have forward contracts in place for cattle sales or grain purchases to smooth out the income
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  and expense volatility. The 15 million is also cross collateral. If you have all your four
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  properties tied up with one bank under one massive facility. The bank controls your entire
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  business. And if they decide to change their agricultural lending policy, you're effectively
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  trapped. And I had a client recently that was caught in this exact situation. One day, the bank
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  decided to tighten their lending policies on agricultural land due to the market conditions,
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  resulting in a forced restructure that put enormous pressure on their cash flow. Fortunately,
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  we had previously recommended splitting the debt across two lenders, which gave them options and
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  negotiating power. At this level, a good broker will often split the debt across two different
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  lenders. You might have property A and B with one bank, and property C and D with another, and this
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  gives you competitive tension and ensures that no single bank manager can dictate the terms of your
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  entire operation. It also provides a backstop if one lender tightens their policies or changes
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  their appetite for agricultural risk. It's like having multiple lines of defence for your
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  business and financial health. Additionally, corporate structures often come into play here.
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  Many operators at this level will use companies or trusts to hold their properties, which offers a
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  benefit from a tax and asset protection, and also a succession planning point of view. The finance
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  structures need to align with these legal structures, often requiring multiple loan accounts
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  or facilities tailored to each entity. A specialist broker will understand how to navigate
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  this complexity, ensuring your financial arrangements reflect your ownership and
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  management structures while maximising flexibility. So remember guys, your debt structure
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  needs to evolve as your business grows. What's worked for your first block won't work for your
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  fourth, and don't let a lazy loan structure hold you back. In expansion, if you're looking to scale
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  up and need a finance structure that actually supports your growth, reach out to season finance.
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  As a broker. This is exactly what I do for my clients, and I'll see you in the next episode.
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  Thanks for tuning in. Dolls in the dirt. If you've got value from today's episode, make sure to
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  subscribe so 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 the link in the show notes.
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  Remember to follow us on socials and catch you next time.