Cheap Money – Good Time To Borrow?
When is a good time to borrow?
Well that question could be debated forever and a day and I think it is fair to say that there would never be a unanimous answer.
However, I think what most people would agree is that the cost of money is unlikely to become much cheaper than it is now. The continued 0.5% Bank of England base rate continues to represent a historic low and with the cost of funds also being at record low levels, then I am sure that even the most conservative borrower may well have to concede that now could be the right time to borrow. In some instances for example the Agricultural Mortgage Corporation are offering margins of less than 1.5% on loans in excess of £1 million
The main prompt for considering borrowing is obviously the reasons for doing so – is there the opportunity to purchase neighbouring land, have you got the chance to buy your tenanted farm, do you want to develop a wind turbine or do you want to invest in that new livestock building? – these are all opportunities which our clients consider daily and in most cases decide to pursue.
The ability to borrow requires sufficient equity and more importantly the ability to service; you could say that these are the prerequisites. During recent times agriculture has seen its asset base increase in value dramatically, however, when faced with making a decision on who to approach and how to go about it, we are becoming increasingly aware that the banks credit teams are becoming more and more focused on well presented cases and it is simply not good enough to say ‘we’ve doubled in value!’. The ability to discuss this with your manager is vital to secure funding, although, as some of our clients are finding to their cost the ability of their manager to secure the funding is out of their hands.
If an offer is made the devil is very much in the detail; does the lowest margin make for the best deal? The answer can be yes, but more often than not it is no; headline rates are there to tempt the customer. How many people are simply grateful to receive an offer and sign up to it without undertaking a process of due diligence.
Questions which people should be asking as a matter of course are:
- is the rate reviewable?
- What are the rate review triggers?
- What is the term of the loan?
- What are the redemption penalties?
- When do the discounted rates finish?
- Am I signing up to the deal which is right for me?
The current round of monetary stimulation packages which have been introduced by the Government have readily been taken up by some banks; they do on the face of it reduce the margin rates which can be quoted, but care has to be undertaken so you fully understand the qualifying criteria. There is no doubt that these are attractive when the borrower ‘ticks’ all the boxes.
When considering borrowing then it is also an opportunity to review existing loans and arrangements; a number of clients have had the unfortunate pleasure of suddenly realising that the deal which they thought they had signed up to is in fact something far more costly than they thought; it is imperative that advice is sought on such deals.
The good news is that margins are reducing but the need to review those offers is more important than ever and therefore it is vital that any business looking to borrow seeks advice as to the pitfalls and opportunities of such offers.
If you wish to discuss any aspects of funding into the rural sector then please Kevin Guy or Louis Fell or visit our AMC webpage