Does Your Business Debt Repayment Structure Hamper Your Cashflow?

A lot of my time is spent looking at finance agreements and wondering why the term of the loan was originally taken.  Whilst most farmers think it is great to take the shortest term of borrowing as possible this might not necessarily be the best idea.

If you borrow £100,000 over 10 years you have annual repayments of £12,149.42 at say 4% interest but your accounts will only show the interest cost say £3,848.92 in year one and gradually decreasing over the remaining years.  However, if you were to borrow over 20 years the annual payments would be £7,271.76 and the annual interest cost in year one £3,939.35.

The accounts will just show the interest cost not the capital repayments so you might make a profit but what about your cashflow? 

When you are buying anything, you do not want to borrow longer than the life of the asset.  So, machinery might last a few years so you may borrow short term.  However, buildings last a long time. Land lasts forever hopefully.  So, a long-term loan may be more sensible.  Of course, if your business is very profitable you may be able to make early repayments if the loan agreement allows it.

Care needs to be taken with any finance agreement to make sure it suits your farm cashflow at the time.  You never know what is around the corner.  That land you always wanted to own might become available next year!  Could you afford it?

Very few farmers regret borrowing over a longer period.  If they did, they could repay lump sums or increase the monthly repayments if rates are not fixed.  More often than not, when the term, loan restructuring happens it’s because the original repayment timeframe was too optimistic and aggressive.   

Feel free to contact Ed on 07434 723443 or e-mail  if you want to talk through your finance agreements and future cashflow requirements in these uncertain times.

Midwest Consulting Limited is regulated by the Financial Conduct Authority and is a registered credit broker FRN793780.