Category: news

Can I Get a Home Loan as a Business Owner? Here’s What You Need to Know

Posted on by Lavinia

Can I Get a Home Loan as a Business Owner? Here’s What You Need to Know

Running a business can offer flexibility and freedom, but when it comes to applying for a home loan, it can also come with a few extra hurdles.

At Sprout, one of the most common questions we hear from self-employed clients is:

“My accountant helps me reduce tax, will that hurt my chances of getting a home loan?”

The short answer? It might.

But with a little forward planning and the right advice, getting a loan as a business owner is absolutely possible.

Here’s what to keep in mind when reviewing your profit and loss, tax returns, and planning for personal lending, like a home loan or residential investment.

1. Be Upfront With Your Accountant About Your Lending Goals

It’s standard practice for accountants to help reduce your taxable income by writing off expenses and reinvesting into your business. But if your business shows little to no profit, most banks and lenders will view your income as low or unreliable.

If you’re considering buying a home or investing in property, let your accountant know early. Distributing more profit to yourself, on paper, can make a significant difference when applying for personal lending.

2. Lenders Will Look at Your Tax Returns, Not Just Your Business Reports

When you apply for a home loan as a business owner, lenders will request:

  • Your personal tax returns
  • Your Notice of Assessments (from the ATO)

These documents are used to verify your actual income. While your business’s profit and loss statement or balance sheet can provide helpful context, they aren’t the primary documents used for loan assessment.

3. What If I Pay Myself a Wage?

Depending on how your business is structured, you may be able to use your wages in a home loan application.

However, in most cases, lenders will still want to see the full business tax return, especially if your wage isn’t stable or represents only part of your income.

4. Getting a Home Loan for a House on a Farm

If you’re living on a rural property or part of a farm, the bank will need to do a property valuation. This is completed by an independent valuer arranged by the lender, and usually involves a full on-site inspection.

The valuation will consider land zoning, infrastructure, and whether it’s a working farm or a rural residential block. The clearer the residential portion is from any farming activity, the more straightforward the lending process will be.

5. What’s the Maximum Acreage a Lender Will Approve?

Some lenders are happy to finance rural residential properties up to 240 acres, depending on:

  • The zoning of the land
  • Location and infrastructure
  • Your deposit size
  • Whether the property passes the bank’s rural residential criteria

It’s worth noting: these approvals can vary significantly between lenders, so working with a broker who understands rural lending is key.

6. Can I Use My Farm as Security for Another Property?

Unfortunately, no commercial or farming land usually can’t be used as security for residential lending. If you’re looking to buy an investment property and don’t want to use cash from your business, you’ll need to use equity in a residential asset or contribute a cash deposit from your personal funds.

7. Is Interest-Only Lending Still an Option?

Yes, but only for investment properties, not for owner-occupied homes.

Interest-only loans can help manage cash flow, especially in the early stages of building a property portfolio. They aren’t suitable for everyone, so you must chat with your accountant before making the switch.

8. Building a Residential Property Portfolio: What You’ll Need

Here’s a high-level snapshot of what investing in residential property could look like:

  • Deposit required: Minimum of 10% (20% to avoid Lenders Mortgage Insurance)
  • Average investment loan interest rate: 6.10%- 6.60%
  • Loan example: $400K loan = approx. $2,518/month repayments (P&I)
  • Rental return: Around $380–$400 per week (based on average market figures)

With current rates, most residential investment properties are negatively geared, meaning they cost more than they earn, but this can provide tax benefits depending on your situation.

Takeaway: It All Comes Down to Planning

Getting a home loan as a business owner isn’t as simple as it is for salaried employees, but it’s completely achievable with the right advice.

✔️ Keep your financials clean and up to date

✔️ Involve your accountant early if you’re planning to borrow

✔️ Work with a broker who understands self-employed and rural lending

At Sprout, we specialise in supporting business owners and farmers through personal lending. If you’re looking to buy a home, invest in property, or just want to understand your options, we’re here to help.

Let’s talk about finance that fits your future.

Diversifying Through Off-Farm Investment Using Equity

Posted on by Lavinia

Why Off-Farm Investment Matters in Succession Planning

At Sprout Agribusiness, we know that succession becomes far more manageable when farming families have access to additional assets. These assets create flexibility, allowing the current generation to step back from the business while providing options for compensation to non-working family members. One avenue we’re increasingly seeing our clients explore is off-farm investment, particularly in commercial property.

While there’s always a case to be made for sticking to what you know, diversification, when done prudently, can build long-term wealth and resilience. Especially as land prices have risen and productivity margins have tightened across mixed farming businesses (particularly in southern Australia), commercial property has emerged as a popular option. Many of our most progressive clients are choosing hard “bricks and mortar” assets over more volatile options like the stock market.

Let’s walk through an example of how a client might use existing equity in their rural property to purchase a commercial property with strategic debt funding support.

Client Scenario: Purchasing a Commercial Property Using Farm Equity

The Background

A client owns a rural property valued at $15 million, with only $3 million in existing debt, leaving significant equity available for investment.

During a strategic planning session with Sprout Agribusiness, the client identifies a goal of securing off-farm income to support retirement and long-term succession. With a 10–20 year outlook in mind, they decide to invest in a commercial property that offers solid returns.

The Investment

The client engages a professional to source a commercial property in a high-growth area. The chosen asset is valued at $6.5 million, with a net yield of 7% (after management fees and holding costs), equating to an annual net income of $455,000.

Sprout Agribusiness provides tailored debt advisory, helping the client leverage their existing farm equity to fund the purchase.

The Funding Structure

  • Borrow $6.5 million at 5.5% interest-only 
  • Annual interest cost = $357,500 
  • Net rental income = $455,000 
  • Excess rental income is used to pay down the loan principal 
  • Acquisition costs (e.g., stamp duty) are paid from cash reserves 

Loan-to-Value (LVR) Snapshot

  • Total asset base = $21.5 million ($15M farm + $6.5M commercial) 
  • Total lending = $9.5 million 
  • Combined LVR = 44.1% 

Understanding Commercial Lending Parameters

  • Commercial lending is often structured as interest-only, which suits long-term cashflow planning. 
  • Depending on lease strength and the borrower’s financial position, LVRs can reach up to 70%. 
  • The strength and duration of tenant leases significantly influence the lending criteria. 

Long-Term Benefits of Commercial Investment

  • Capital Growth: Over time, property values may increase in line with rental yield growth and CPI-linked rent reviews. 
  • Decoupling the Debt: As the loan is paid down, the commercial debt can eventually be removed from the farm’s balance sheet, freeing up the original rural asset. 
  • Income Stream: Upon full repayment, the commercial property can offer a secure income stream in retirement or support future family needs. 

Final Thoughts

At Sprout, we believe diversification is about control, not risk. When executed with sound planning, the right professional support, and a clear long-term strategy, investing in commercial property using existing farm equity can strengthen both the family balance sheet and your succession plan.

If you’re interested in exploring how this could work for your business, reach out to the Sprout Agribusiness team today.

 

Debt Funding in Succession Planning: Why It Matters

Posted on by Lavinia

Succession planning in farming businesses is rarely straightforward, and in a significant number of cases, there’s a debt component involved. Whether the business is currently debt-free or already carrying liabilities, the transition from one generation to the next often necessitates some form of financial restructuring.

Here are three common scenarios where debt funding plays a role:

Scenario One

The business has no existing debt. However, as part of the succession plan, the incoming generation needs to compensate their parents and/or siblings for land or equity. This introduces a new debt burden that must be carefully managed.

Scenario Two

There is existing debt in the business. As ownership or management transitions, this debt may need to be transferred, refinanced, or increased, particularly if the business is expanding or if asset transfer is involved.

Scenario Three

Mum and Dad begin stepping back from the day-to-day, but remain involved, while the next generation ramps up operations and growth. In this instance, both generations are working together, but often, the parents still hold land assets and therefore remain tied to business liabilities.

Why Debt Funding Matters in Succession

In all three scenarios, debt funding plays a pivotal role in shaping the feasibility of the succession plan.

A key part of the planning process is determining the appropriate asset compensation for the older generation, particularly around retirement needs, as well as balancing this with the financial goals and capability of the working family members. This includes assessing whether the business can sustainably manage the resulting debt into the future.

The Role of Debt Analysis in Succession

Sustainable debt analysis isn’t just a financial modelling exercise — it’s a core part of decision-making that affects all stakeholders. At Sprout, we typically refer to Year-In-Year-Out (YIYO) debt levels, that is, the level of debt the business can reasonably carry in an average year without undue stress.

Setting a realistic YIYO debt target helps determine how much equity can be transferred, what compensation non-working family members might receive, and how the business can maintain operational viability.

When Should You Engage a Debt Advisor?

Early. A debt advisor should be brought in once the initial goals and priorities of the incumbent generation are understood. These early conversations shape everything that follows, including how succession will be structured.

It’s common for the incoming generation to have limited experience managing debt. This is where a trusted advisor becomes critical, helping to provide financial education, scenario planning, and clarity around what carrying debt actually means for the business long-term.

Key Considerations When Structuring Debt in Succession

  • Sustainable YIYO debt levels: What can the business afford to repay over time without compromising growth or resilience?

  • Security position: How will loans be secured under the new structure?

  • Equity position: What percentage of the business does each party hold post-transition?

  • Release of security: Will parents still own land, or is there a plan to release or reduce their exposure?

  • Ownership of the trading entity: Who owns and controls the day-to-day operations?

  • Compensation strategies: What are the financial arrangements for siblings and retiring parents?

  • Bank implications: How will second mortgages or cross-collateralisation affect borrowing power?

Succession planning is not just a family discussion — it’s a financial strategy. Sustainable debt planning allows both generations to move forward with confidence, knowing the business is structurally sound and future-ready. Engage early, seek advice, and ensure the numbers support the vision.

If you’re considering succession and need clarity around debt structuring, Sprout’s team is here to guide you through the process.

Why Variable Interest Rates Can Support Succession Planning in Farming Businesses

Posted on by Lavinia

Why Variable Interest Rates Can Support Succession Planning in Farming Businesses

Last month, we explored the pros and cons of fixing your farm business’s interest rate versus remaining on a variable rate. Since then, the Reserve Bank of Australia (RBA) has announced a further 25 basis point reduction, and based on their latest commentary and meeting minutes, there are indications of a further 50–75 point drop throughout the 2025 calendar year. While not guaranteed, this potential downward trend reinforces the case for interest rate flexibility.

In our previous newsletter, we highlighted how a variable interest rate can offer greater flexibility, particularly useful in dynamic situations like succession planning. In this month’s piece, we’ll unpack exactly why that is, and how maintaining a variable rate can better support farming families as they navigate intergenerational business transitions.

Why Variable Rates Matter in Succession Planning

Succession planning often involves major structural changes to a family’s financial and operational arrangements. This can include:

  • A change in business entity 
  • The introduction of new debt 
  • A shift in decision-making and financial strategy as the next generation steps up 

More often than not, the incoming generation will want to work with their own professional advisors and, at times, a new banking partner. If the business has fixed-rate loans in place, this can lead to challenges such as break costs or reduced flexibility when restructuring.

Sprout Ag is also observing significant shifts across the banking sector, from pricing to appetite for rural lending, making it all the more important for families to maintain optionality.

The Three Big Questions in Succession

Every family navigating transition planning typically has to answer these three questions:

  1. How much does the outgoing generation need for retirement? 
  2. What level of debt is sustainable for the incoming generation? 
  3. What is a fair and appropriate financial outcome for non-operating family members? 

There’s no universal formula for getting this right. The answers depend on family values, business history, and individual goals. But one thing is consistent: these decisions are significant, often life-changing, and usually involve some form of debt restructuring, where loan flexibility can make a real difference.

Fixed Rates Can Limit Strategic Options

Fixed loans can create friction during succession for several reasons:

  • Break Costs: If a fixed loan needs to be paid out early to enable restructuring, break costs may apply, adding unnecessary pressure to the process. 
  • Bank Compatibility: The existing bank may not support the next generation’s plans, requiring a shift in providers. 
  • Loss of Leverage: Fixed-rate products can reduce the business’s ability to pivot or negotiate on terms. 
  • Misalignment: A new generation may want to bring in their own team, strategy, or financial partners—something that can be limited by legacy loan structures. 

So—Should You Never Fix?

Not necessarily.

There are times when fixed rates make sense, particularly when forecasting and managing cashflow in a stable business phase. But when your farming business is facing change, such as succession, it’s worth carefully considering the role of flexibility.

If you’d like to explore how your current lending structure aligns with your long-term goals or succession plans, the Sprout Ag team is here to help.

Let’s chat.

Fixed vs Variable: A Fresh Look at Interest Rate Strategy

Posted on by Lavinia

Fixed vs Variable: A Fresh Look at Interest Rate Strategy – April 2025

There’s a lot of noise at the moment around where interest rates are headed. Many of our clients at Sprout Ag are currently locked into fixed rates, and the question of whether to break those rates – or stay the course – is coming up more and more.

A while back, we wrote about the pros and cons of fixing your interest rates. That advice still stands, but we thought it was timely to add some updated commentary, particularly with the uncertainty we’re seeing across the market now.

At Sprout Ag, we tender between $500–800 million in farm debt every year. Analysing the cost of debt is something we live and breathe – it’s part of our day-to-day work, and risk management conversations with our clients are ongoing.

The reality is: no one really knows where interest rates are going. This has been proven time and time again. Right now, there’s a lot of chatter about tariffs and their broader impacts. If tariffs continue to unfold in the current direction, the simple likelihood is that they will be deflationary for Australia, which would put downward pressure on interest rates.

In the meantime, we’re receiving increased enquiries from farming businesses asking about breaking their current fixed rates and shifting to variable. At the same time, banks are actively promoting new fixed-rate products. It’s a fascinating dynamic and one we’re keeping a close eye on.

We’re also seeing a significant difference in interest rates depending on whether a client is on a bank’s reference rate or a market-based rate (priced off BBSW or BBSY). These nuances make it even more important to assess each business’s situation individually rather than adopting a ‘one-size-fits-all’ approach.

A quick refresh on the pros and cons of fixing vs variable:

Pros of Fixed Rates:

  • Certainty of repayments for the fixed term.
  • Protection if interest rates rise sharply.
  • Helpful for budgeting and cash flow forecasting.

Cons of Fixed Rates:

  • Less flexibility (break costs can be significant if you want to pay off debt early or refinance).
  • You could miss out if rates fall.
  • Limited ability to restructure debt during the fixed term.

Pros of Variable Rates:

  • Flexibility to pay down debt faster without penalty.
  • Ability to take advantage of falling interest rates.
  • Easier to refinance or restructure if opportunities arise.

Cons of Variable Rates:

  • Exposure to rising interest rates.
  • Less certainty for budgeting purposes.

Our personal view?

Variable interest rates generally offer greater flexibility. In our experience, fixed rates have rarely delivered a major benefit for clients, except in the case of locking in at the ultra-low rates we saw a few years ago.

In summary:

Choosing between fixed and variable rates should always come down to your business’s circumstances, cashflow strategy, and risk appetite. There’s no blanket answer, but the important thing is to make an informed decision, with a clear understanding of both the risks and the opportunities.

If you’re thinking about reviewing your debt structure, reach out to the Sprout Ag team. We’re here to help you navigate these conversations with confidence.

Why Scale Matters More Than Ever in 2025

Posted on by Lavinia

In today’s economic climate, the ability to scale—spreading a greater amount of revenue over your fixed costs—has never been more critical for Australian businesses.

Fixed costs such as wages, insurance, interest rates, and electricity have surged by over 30% in recent years, with variable and input costs also rising significantly. While some strategies can help reduce these expenses—such as using Sprout Ag’s bank tender service to secure lower interest rates—the reality is that most fixed costs are here to stay.

One of the most effective ways to navigate these rising costs is to focus on increasing revenue and production, allowing your business to spread those expenses across a larger income base.

The Power of Scale

At Sprout Ag, we’re seeing a clear trend—clients who operate at scale, whether through higher production volumes or greater revenue in a single commodity, are less vulnerable to rising costs.

Scaling up doesn’t always mean increasing expenses. In many cases, growing revenue doesn’t necessarily require additional machinery, higher accounting fees, or increased insurance costs. With the right planning, many businesses can grow revenue by 20% or more without significantly expanding their overheads.

Staying small and simply watching expenses is unlikely to be a sustainable long-term strategy. Instead, as turnover and production become critical to business success, ensuring revenue growth exceeds fixed costs is key to profitability.

Building Scale Into Your Business: Key Considerations

  • Shift Your Mindset – Fixed costs are unlikely to return to where they were four or five years ago, so adjusting your business strategy accordingly is essential.
  • Plan for Growth – Set time aside to explore different revenue growth strategies and how they can be spread across existing fixed costs.
  • Focus on Sales, Not Expenses – Identify ways to boost sales without proportionally increasing costs. Businesses with a variable cost structure often have the advantage here.
  • Review Overhead Usage – Assess whether your current overheads are still serving your business effectively, and consider reallocating capital to more productive areas such as equipment.
  • Leverage Workforce Capacity – Explore whether there’s additional capacity within your family farm workforce to support business expansion.

Access Our Free Scale Tool

To help businesses navigate these challenges, we offer a free Scale Tool as part of our Ag Pro client work. This tool provides insights into how scaling strategies can be applied to your business to maximise profitability.

If you’re looking to future-proof your business in 2025, now is the time to focus on scale. Get in touch with Sprout Ag to learn how we can support your growth journey.

 

Why Getting the Right Bank Has a Tenfold Impact on Your Ag Business

Posted on by Lavinia

Why Getting the Right Bank Has a Tenfold Impact on Your Ag Business

When it comes to wealth creation in agriculture, the long-term appreciation of land is the cornerstone of financial success. Historically, agricultural land has appreciated at an average rate of around 7% per annum since Federation. While this isn’t a guaranteed year-on-year increase, over time, land value growth has been a proven method for building generational wealth in the ag sector.

A common financial strategy in agriculture is to pay interest rather than aggressively repaying debt—provided the business has the financial capacity to handle this approach. However, this strategy relies heavily on securing the right finance structure and, more importantly, working with the right banking partner.

Debt Procurement: A Critical Factor in Agricultural Wealth Creation

One of the biggest influences on long-term success in agriculture is how debt is structured and sourced. The ag finance landscape is diverse, consisting of eight core banks alongside a number of niche financial providers that offer stock loans, inventory finance, and specialised ag lending solutions.

Despite this range of options, there are significant variations in how individual banks—and even different bankers within the same bank—assess and price risk.

  • Interest Rate Discrepancies: Even within the same bank, it’s not uncommon for two different clients to receive rates that differ by up to 1%.
  • Subjective Credit Appetites: One banker may view an ag business as a risky proposition, while another banker in the same institution might see it as a prime lending opportunity.
  • Regional Variations: Interest rates and credit appetite can vary from one region to another, meaning the financial terms available to you may be significantly different depending on where your business is located.

Banking is Still a People Game

Despite technological advancements, banking remains a relationship-driven industry. Who you bank with matters just as much as which bank you choose. This is particularly true in the agricultural sector, where financial success depends on strategic decision-making around land acquisition, working capital, and investment in livestock or equipment.

Troy Constance, Sprout Ag’s CEO, previously led a team of up to 500 ag bankers, and the difference in performance between individual bankers was staggering—some outperformed others by a fiftyfold margin in terms of profitability and lending growth.

This highlights a critical reality: pairing your business with the wrong banking professional can be disastrous. A poor banking partner can cause unnecessary delays, limit opportunities, and ultimately hinder the growth of your business.

The Risks of Choosing the Wrong Bank

Working with the wrong banking professional—or being locked into an unsuitable financial structure—can have serious long-term consequences, including:

  • Missed Property Acquisitions: If your bank doesn’t understand the nuances of ag lending, you may miss out on crucial opportunities to acquire land, delaying growth.
  • Limited Livestock Purchasing Power: Without access to appropriate livestock trading facilities, you may be unable to capitalise on profitable opportunities.
  • Stagnation: Poor banking relationships can leave you treading water for years, unable to progress or reinvest in your business effectively.

Beyond Rates: What to Look for in an Ag Finance Provider

While competitive interest rates and loan structures are essential, a strong banking relationship goes beyond numbers. A proactive and knowledgeable ag finance provider should offer:

  • Credit-Workshopped Acquisition Finance: Ensuring pre-approved finance is in place before property opportunities arise.
  • Pre-Approved Equipment Finance Facilities: Avoiding delays in acquiring vital machinery during peak operational periods.
  • Livestock Trading Facilities: Ready access to funding for purchasing stock when market conditions are favourable.
  • Adequate Working Capital Facilities: Establishing limits higher than immediate needs to provide financial contingency.
  • Extended Interest-Only Periods: Allowing greater flexibility in debt management to support business growth.

In agriculture, financial success is not just about working hard—it’s about working smart. Choosing the right bank and the right banker can make a tenfold difference in the trajectory of your business. With the right financial partner, you can seize opportunities, navigate industry challenges, and ensure your business remains positioned for long-term growth.

If you’re unsure whether your current banking relationship is serving your best interests, it might be time to explore your options. At Sprout Ag, we specialise in helping farmers and agribusinesses secure the right financial solutions tailored to their needs—because when you get the banking equation right, the potential for success multiplies.

 

You Can’t Plan for 2025 Without Knowing Your Long-Term Goals

Posted on by Lavinia

You Can’t Plan for 2025 Without Knowing Your Long-Term Goals

As we gear up for 2025, it’s tempting to dive straight into planning—but without a clear vision of your long-term goals, it’s like setting out on a journey without a map. At SproutAg, we believe effective planning starts with understanding what’s truly important to you, both personally and professionally.

Here’s how we approach planning to help our clients create meaningful, achievable goals.

Start with What Matters Most

When we facilitate planning meetings, we begin by asking a few key questions to uncover your long-term vision:

  • What is your 10–30 year goal?
  • Where will you be living?
  • What will you be doing?
  • What does “a good spot” look like for you?
  • What’s truly important to you?

The answers we hear often revolve around lifestyle, family, and personal aspirations. There’s no “right” or “wrong” here—it’s about creating a picture of the life you want.

We encourage clients to “shoot from the hip” when answering. It’s not about perfection; it’s about clarity. Involving all key family members in this process ensures everyone can express their individual views. Remember, the goal is not to overthink but to establish an authentic direction.

Aligning Three-Year Goals with the Big Picture

Once you’ve defined your long-term goals, the next step is to break them into manageable milestones. This is where your three-year goals come into play.

Ask yourself:

  • What does my business need to achieve in the next three years to support my 10–30 year goals?
  • What are the logical first steps?

Think of your business as a vehicle to help you reach your ultimate destination. By focusing on three-year goals, you can map out a clear path, connect long-term aspirations to actionable steps, and even cashflow these plans to bring them to life.

2025: Your First Step Toward the Future

Planning for 2025 is about taking the first step toward those three-year goals. Your one-year plan should act as the foundation for both your immediate priorities and your broader vision. It’s the first step up the mountain toward your long-term objectives.

Without a long-term perspective, planning becomes a repetitive cycle of execution without progress. By aligning your goals, you’ll ensure that each year builds on the last, creating a strategic framework for meaningful growth.

Keep Strategic Goals Front and Centre

Don’t let planning become a once-a-year exercise. Keep your strategic goals on the agenda and review them regularly. This ensures they remain relevant and reflective of your evolving priorities.

Tips for Planning Your 2025

To make your planning process productive, consider these tips:

  1. Create the right environment – Minimise distractions to focus on the task at hand.
  2. Share your plans – Involve key family members and your working team.
  3. Set a regular cadence for meetings – If it’s not in the diary, it won’t happen.
  4. Document everything – Take photos or record meeting notes to track progress.

Ready to Kickstart Your 2025?

At SproutAg, we’re here to help you align your personal and professional goals for a successful year ahead. Contact your closest SproutAg adviser to schedule your 2025 kickstart meeting and ensure your plans are built for long-term success.

Sprout Ag Insight: Navigating Regional Investment Corporation (RIC) Loans

Posted on by Lavinia

Sprout Ag Insight: Navigating Regional Investment Corporation (RIC) Loans

The Regional Investment Corporation (RIC) is a Federal Government-backed lender offering low-interest loans to farming businesses, helping many reduce interest expenses and improve cash flow. With the first wave of RIC loans transitioning from interest-only to principal and interest (P&I) repayments, it’s vital for borrowers to review their financial commitments and consider refinancing options.

Understanding the RIC Loan Structure:

  • Term Overview: RIC loans are structured as 5 years interest-only, followed by 5 years of P&I repayments.
  • Repayment Expectations: Borrowers must start repaying the principal after the initial 5 years. The repayment amounts may vary between borrowers, though principal repayments are expected.
  • Limited Extensions: Options to extend interest-only terms with RIC are limited.

 

Why Review Your RIC Loan Now?

Many RIC borrowers will soon face their first principal repayments. This can impact cash flow significantly, particularly after challenging seasons such as droughts or poor harvests.

Sprout Ag has helped several clients refinance their RIC loans back to banks to extend interest-only periods. In some cases, clients also secured lower interest rates by consolidating loans and removing second mortgages tied to RIC. This strategy has provided much-needed cash flow relief and financial flexibility.

 

Sprout Ag’s Top Tips for RIC Borrowers:

  1. Review Your Loan Terms:

Check when your RIC loan will switch to principal and interest repayments. Understanding the timeline is crucial for proactive financial planning.

  1. Assess Cash Flow Impact:

Determine the principal repayment amount and how this will affect your operating budget. Be realistic about your ability to meet these obligations.

  1. Consider Refinancing Options:

Explore refinancing your RIC loan back to a bank to secure extended interest-only terms and potentially lower interest rates. This can improve liquidity and reduce financial pressure.

 

Need Guidance?

Sprout Ag’s team of agribusiness finance experts can help you navigate the complexities of RIC loans, assess refinancing options, and optimise your financial strategy. Contact us today for tailored financial solutions designed for the unique challenges of agribusiness.

It’s the Principle of the Matter: Smart Strategies for Managing Principal Repayments in Agriculture

Posted on by Lavinia

In the world of agricultural finance, one of the most common kitchen table discussions is around repaying debt—specifically, how and when the principal will be paid down. This conversation is not only frequent but also vital, as most farming operations are expected to repay their term debt fully over approximately 20 years. However, navigating these repayments effectively requires strategic planning, especially in the face of fluctuating cash flows and unpredictable seasons.

Many farm loans are set up as interest-only for the initial years, allowing cash to be allocated towards essential priorities like property improvements, building livestock numbers, or allowing time to stabilise the business. For new purchases, expansion, or succession planning, an interest-only period provides crucial breathing space for businesses to adjust and plan for a more substantial repayment load in the future.

When Principal Reductions Complicate Cash Flow

It’s not uncommon to see banks impose principal reduction requirements, even if the farm may not be in an optimal position to meet them. This approach can sometimes lead to a catch-22, where a principal reduction is made, only for the business to require an overdraft extension soon after to meet operational expenses. In this scenario, focusing cash flow on debt repayments at the expense of working capital can feel like “robbing Peter to pay Paul.”

For those managing higher levels of equipment finance, it’s essential that banks recognise this shorter-term debt is being steadily repaid. This may help to offset the need for additional term debt reductions, balancing the financial picture and avoiding undue strain on working capital.

Strategic Tips for Managing Principal Repayments

To make principal repayments work for your farming business, here are some key strategies:

  1. Know Your Repayment Dates: Schedule and diarise repayment dates well in advance, allowing time to adjust your budget. Revisiting the budget months ahead of due dates can ensure that you’re financially prepared.
  2. Question the Conditions: If your bank requires principal reductions, don’t hesitate to ask for the reasoning behind these conditions. Are they still relevant if your business position has evolved?
  3. Consider Opportunity Costs: Sometimes, using cash flow to invest in other opportunities yields higher returns than repaying debt. Weighing up opportunity costs can help you determine if the cash would be better used elsewhere.
  4. Prioritise Flexibility: Where possible, opt for long-term interest-only facilities with redraw options. This allows you to repay principal when it aligns with your cash flow and redraw if cash is needed later.
  5. Shop Around for Options: A second opinion can provide valuable insight. We often see one bank insisting on principal reductions while another may offer an extended interest-only term. Exploring multiple banking options may reveal more favourable terms.

Ultimately, managing principal repayments is about balancing the need for financial progress with the reality of agricultural cash flow. Strategic planning and maintaining flexibility can help protect your business’s financial health while positioning you for growth and opportunity.