By The Land Bank Team
Agriculture is a capital-intensive industry, with farmers having to source funding either through loans or their own money to purchase equipment, supplies, and livestock, and make improvements to their operations. This is compounded by the ongoing challenges within the sector.
Research from the Bureau for Food and Agricultural Policy (BFAP) indicates that the input cost environment remains challenging, while costs of fertiliser and chemicals have come down, administrative costs and electricity continue to rise at rates well above inflation, driving irrigation costs higher, while wage rate increases typically also outpace inflation. This includes also the interest rates that remain relatively high with prime at 11.75%.
Farmers are also struggling with output prices that haven’t risen as fast as their costs. The farmers as they approach financial institutions for finance, then need to be demonstrating that the business case is sound and fundable so that it’s convincing to banks and other agricultural lenders. Without access to financing, it can be incredibly difficult for farms to thrive, invest in growth or even continue operating year after year.
The Land Bank as an agricultural lender, whose objective among others is to provide financial services to promote and facilitate access to ownership of land for the development of farming enterprises, and agricultural purposes by historically-disadvantaged persons that include the promotion, facilitation, and support of commercial agriculture and food security, must do its work to ensure there are fewer impediments to accessing funding to enable these imperatives.
To achieve this, it’s essential to address common challenges that can lead to loan rejections. In this article, we explore some possible reasons behind some loan declines, and provide actionable advice to help farmers enhance their applications, ensuring they receive the necessary financial support.
Understanding why loans are often declined and how to improve the quality of applications is crucial for success.
Common reasons for loan declines
1. Farmers are eager to start big
Many applicants are eager to start big, without regard to the huge capital requirement against the cost of funding by wanting to invest in expensive farm units. However, these ambitious plans often overlook the financial strain, as such investments are not always supported by the ability to service the debt they entail. This approach can lead to the financial model not being able to demonstrate the sustainability of the operation to be financed. It’s crucial for applicants to carefully assess their financial capacity and consider more practical, scalable options that align with their resources and goals.
2. Lack of security and balance sheets
One of the primary reasons loans are declined is the absence of adequate security or a strong balance sheet. Lenders need assurance that their investment is protected, and a solid financial foundation is vital. Farmers who can demonstrate some level of own contribution are more likely to succeed. Blended finance provides an innovative solution by using a grant to leverage additional private capital, which can also assist in strengthening financial positions.
For example, a R1 million grant from the Blended Finance Scheme programme can be used alongside a R1m private loan to a qualifying farmer. This results in a total of R2m in financing made possible due to the blended structure. Without the grant, many farmers and agribusinesses would lack the security and financial standing to ever obtain such large private agricultural loans.
In a case like this, the grant money strengthens the balance sheet of the farmer and serves as skin in the game, providing the necessary security to incentivise private lenders to provide additional financing.
3. Insufficient repayment ability
The ability to repay the loan is critical. Lenders assess whether the farming operation can generate enough revenue to service the debt. Hence it’s always advisable to consider the level of debt against the productive value of the property being purchased. It is advisable that as a farmer makes the intention to buy the property, he/she is then provided with the valuation of the property to be able to determine the realistic nature of the asking price against comparable properties. This also enables the farmer to be able to have an understanding of the natural capital of the specific farm intended to be purchased.
4. Lack of experience and mentorship
Many applicants underestimate the complexity of farming, particularly with ventures like intensive farming operations like broilers and piggeries. These operations seem straightforward but involve many subtle intricacies that only come with experience in the industry. Successful farming requires experience and often the guidance of a mentor.
Without proper knowledge, new farmers often miscalculate budgets, misunderstand processes or make easily avoidable mistakes that jeopardise success. To overcome limited experience, bringing on an official mentor can demonstrate preparedness and significantly strengthen loan eligibility. The ideal mentor should have years of direct industry experience and can provide key guidance on budgeting, husbandry, health/nutrition, and marketing.
They help new farmers anticipate challenges and support them in making smart operational decisions. Appointing a committed, remunerated mentor can significantly enhance a farmer’s chances of success. Informal advice tends to be inconsistent and unreliable.
The Land Bank with the understanding of often having to consider proposals for first-generation farmers – including young people – has purposefully established a unit with its strategy department called Partnership Development and Ecosystem Coordination to facilitate this type of support needed by farmers.
5. Financial literacy and bookkeeping
Financial literacy is another hurdle, especially for start-up operators who may not have been exposed to a credit environment. The absence of organised/credible financial and production records already signals a potential risk to potential lenders. Proper bookkeeping is essential; farmers must accurately record income and expenses, including pending income from harvested but unsold produce.
Conclusion
Strengthening loan applications is crucial for gaining investor-backing and securing your farm’s future. With the tips and guidance provided here, farmers will be empowered to put their best foot forward and demonstrate to lenders that they are loan-ready.