Expanding your farm whether by purchasing additional land, investing in new machinery, or diversifying into renewable energy often requires external finance.
While lenders are keen to support agricultural businesses, they operate under strict risk assessment frameworks. Understanding what lenders may look for can make the difference between a smooth approval and a delay.
The first step to obtaining external finance is deciding what you require. Lenders often offer finance options tailored to the agricultural sector, and it is a good idea to review these to assess what arrangement suits your business needs best. If you have a regular contact within a bank, they may be able to signpost you towards a member of their farm business lending team.
Once you have agreed the type of financing you require for your business, a lender will usually issue a loan agreement or facility letter that outlines the terms of the finance arrangement, and what the lender will need from you in order to proceed. Having this information prepared ahead of time can be beneficial in preventing delays. A solicitor may be able to advise you on the terms of a loan agreement or facility letter and outline the obligations that you will have to comply with.
This article focuses on lending to farm businesses in Northern Ireland and reflects general UK banking practice.
Typical Lender Requirements for Finance
Especially with larger financing arrangements, lenders often expect a clear and well-structured business plan. This should explain the purpose of the loan, outline how the funds will be used, and include realistic income and expenditure forecasts.
Strong financial records are equally important. Lenders will want to see recent accounts, tax returns, and details of any existing debt. If your accounts show volatility, it may be prudent to provide context, as lenders expect confidence that repayments will be sustainable. Solicitors often work alongside accountants to ensure a financial position is presented accurately and that any existing charges or encumbrances on your property are properly disclosed. They can also advise on how new security arrangements will interact with existing obligations. Lenders will usually instruct their own solicitors to act for them, and you should also consider instructing your own solicitor and accountant to advise you independently.
Security is another key consideration. Agricultural loans often require collateral, which could include land, property, or machinery (for example, by way of a legal charge or fixed charge over assets).Granting security can restrict your ability to sell or transfer assets without lender consent, so it’s vital to understand these implications before signing any agreement. A solicitor can advise you on the implications of entering into security and assist with the drafting and review of security documents to help ensure that the documentation is clear, appropriate for your circumstances and does not impose unnecessary restrictions. A solicitor can also negotiate terms within a security document in order to protect your flexibility – for example, allowing you to replace machinery without triggering a breach.
When security is taken over property, lenders will seek to verify the title to the land. This process often involves a valuation being carried out on the land and the lender’s solicitor preparing a report on title which will identify legal risks associated with the property. Engaging with a solicitor early can help to identify any problems with your property early, so you can move to resolve these issues ahead of time.
Other documentation that a lender may require in relation to property include (but not limited to):
- Adequate insurance cover,
- Planning permission for new or existing projects,
- Evidence of environmental compliance,
- Evidence of all necessary consents.
Please note that specific requirements will vary from case to case.
Taking Legal Advice
As outlined above, a solicitor can assist with understanding of the arrangement you are entering into and can also assist with negotiating terms on your behalf. Taking legal advice can help to ensure that:
- Loan and security documents are sufficiently clear and appropriate for your circumstances.
- Your rights over land and equipment are preserved.
- Planning and title issues are resolved before they become obstacles.
- Agreements with lenders and third parties are properly negotiated.
- Expansion and diversification plans do not conflict with lender requirements.
Conclusion
Preparation is key to obtaining financing arrangements efficiently and without hurdles. Engage with your lender early to see what arrangements are available to you, and seek professional advice at an early stage.
This article is for general guidance only and does not constitute legal or financial advice. Specific advice should be taken on your particular circumstances before entering into any finance or security arrangements.
Find out more about Cleaver Fulton Rankin’s Agribusiness legal services here.
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