What is Stress Testing by a Bank?
I have recently been talking to banks about how they currently look at interest rates and how they look at variable rate lending. It varies from bank to bank and is also linked to how their EBITDA (Earnings Before Interest Taxes Depreciation and Amortization).
The calculations are pretty standard but the cover they look for on EBITDA varies slightly as well as the potential interest rate rise cover, they are looking for. What would happen to your bank balance if rates increased?
This is all linked not only to your existing loan repayments but also includes your HP Commitments. This will also include Bounce Back loans. I expect many loans have had to be extended to make them affordable.
Banks will also stress test your budget proposals on sale prices e.g., milk price. Though milk price may be 30ppl currently they may use 28ppl which is a historic long term average price. This test price will vary from bank to bank and in the above example it reduces cash generated by £20k per 1 million litres sold which is significant when faced with borrowing extra funds.
Of course, all banks have to be responsible lenders not only when doing new lending but also when renewing overdraft facilities or agreeing increases. They have to email@example.com a margin of cover for an increasing interest rate or falling sale prices.
Contact Ed Warren on 07434 723443 or e-mail firstname.lastname@example.org, as I am always happy to talk to farmers about any issues they may be facing regarding lending propositions and would advise all farmers to take considerable care when taking out new finance commitments.Midwest Consulting Limited is regulated by the Financial Conduct Authority and is a registered credit broker FRN793780. We are members of the NACFB.
- What Is Happening To Energy Prices?
- Free Farm Business Review
- Milk Powder Availability
- Commodities Update (7th October)
- Why Not to Factor in Body Weight Loss in Your Diets for Fresh Calvers
- What is Stress Testing by a Bank?
- Are you ready for your maize harvest?
- Are you going to the Dairy Show?
- DBL Grass Trials Farm Walk
- Customers are not just External