Term Loans, Overdrafts and Specialist Short-Term Finance

The Agricultural lending landscape can seem complicated and difficult to navigate at times. There are multiple reasons farmers seek finance and multiple financial institutions offering a plethora of products. The five loans most commonly adopted in agriculture are short term finance, agribusiness line of credit (overdraft), term loans, livestock finance and equipment finance. The main financial motives are land purchases, capital expenditure or cropping inputs. Before making the sometimes-difficult decision of which product is right for you it is important to get the right advice and prepare the necessary business plan, cash flow projections and other relevant financial information. To make the decision a little bit easier, we’ve put together a quick summary of term loans and overdrafts and how they can complement specialist short-term finance options.

What is a term loan and what is it used for?

A term loan is a loan repaid in regular instalments over a set period of time. Term loans usually last between five and ten years but may last as long as 30 years in some cases. The customer generally has a choice of variable and fixed interest rates and may also have the ability to split the loan between fixed and variable to get that balance of certainty and flexibility. Repayments are generally principal and interest, but most financiers will offer the potential for an interest only period. This is a mechanism some farmers use to delay capital outlay while their assets get to a point of producing a solid income. Term loans are often used to facilitate large purchases such as property or making capital improvements such as new farm buildings or other infrastructure.

What is an overdraft and what is it used for?

An overdraft facility is a credit agreement made with a bank or financial institution that allows an account holder to use or withdraw funds up to an approved limit. The facility works like an approved loan where money can be withdrawn as and when required and the farmer is only charged interest on the amount borrowed and only for the time it was borrowed. The line of credit is generally given based on a client’s assets. The overall limit and the rate of interest charged is determined by the size and nature of the asset which is offered as security. Overdrafts are generally established for farmers who have short term cashflow needs and the balance is either repaid monthly or annually.

There are many different forms and functions an overdraft can have such as assisting cashflow, covering crop inputs, machinery payments, interest costs, term loan repayments, stock purchases etc. Farmers need to be cognisant of what they’re using the overdraft for and ensure the facility they choose meets their requirements. Consideration needs to be given to the loan term, repayment frequency, collateral required, flexibility and costs.

Why specialist short-term finance?

While the two above-mentioned forms of finance will always have their place, other seasonal finance options can at times be more appropriate and, in most instances, complement the above-mentioned loan types. For example, when using an overdraft in tandem with a specialist short-term facility such as Agfarm Accelerate, overdraft funds that may have been allocated to crop inputs can be freed up for other uses such as stock purchases, machinery payments and staff wages, increasing cashflow during the season and potentially decreasing the size of the intended overdraft.

What is Agfarm Accelerate?

Agfarm Accelerate gives broadacre and dairy farmers a line of credit at participating rural merchandisers for crop inputs such as fuel, agchem, irrigation water, fertiliser, lease payments, seed and crop insurance. Although this may seem similar to an overdraft, Agfarm Accelerate takes security over the future crop rather than physical property. The facility is paid post-harvest from commodity sale proceeds when cashflow isn’t as tight. For more information on Agfarm Accelerate and how it can assist your business’s cashflow, call your regional manager on the contact details below or visit agfarm.com.au/finance.

Reid Seaby
WA Regional Manager – 0439 625 853

Kate Phillips
SA Regional Manager – 0438 128 472

Anthony Hall
QLD & NSW Regional Manager – 0400 873 777

James Ryssenbeek
VIC Regional Manager – 0447 743 556