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:
- How much does the outgoing generation need for retirement?
- What level of debt is sustainable for the incoming generation?
- 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.