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Banking For New Entrants to milk Production

Banking For New Entrants to milk Production. June/July 2012. New Entrant Background. Capital is difficult to acquire Banking industry issues EU financial issues Quota is a a challenge Milk price is now cyclical Single farm payment is under review So Difficult Environment!!.

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Banking For New Entrants to milk Production

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  1. Banking For New Entrants to milk Production June/July 2012

  2. New Entrant Background • Capital is difficult to acquire • Banking industry issues • EU financial issues • Quota is a a challenge • Milk price is now cyclical • Single farm payment is under review • So Difficult Environment!!

  3. Types of Finance • Bank Loans 5-6% • Overdraft 9-13% • Hire Purchase/leasing 6-10% • Credit Union 8-11% • Merchant Credit 12-14% • Contractor 5%?????? (sometimes none) • Credit Card 18%+

  4. What the Bank Needs!!! • Repayment Capacity • Security • Margin

  5. Costs of funds (6 month Euribor) • Euribor 2009 1.57% • Euribor 2010 1.17% • Euribor 2011 1.62% • Euribor 2012 Declining currently • 6 month Euribor now 0.95%

  6. Costs of Funds for bank • Euribor 6 month 0.95% • Irish Bank cost 1.26% • Bank Margin (3-4%) 3.5% • Total 5.71% • Do cash flows @ 7.5% at least

  7. Security • Now requires a legal charge • Split folios if possible- allows flexibility • Present and future borrowings need to be considered • Don’t put all eggs in one basket • LTV can effect rate • May ask for more than adequate security

  8. You Look for • Longest term Possible (cash flow will be the challenge) • Rate referenced to Euribor • Transaction/transfer costs – what are they • Security- as little as possible • Follow the Top Man • Relationship/farmer friendly • Try to get banking person to visit your farm • No point in getting good rate if you cant get the money!!!

  9. Independent advice • Study loan offers carefully • Read the fine print • Ask if you are not sure • Watch out for early payment penalties • Review period • Review security • Don’t sign in a hurry!!

  10. Your Image • Professional, Best Farmer, Growth potential, ambition, etc. • Complete knowledge of your profitable business • No ifs, buts or don’t knows • Profit monitor • Business plan • 4 yr accounts • Tidy office & prompt replies to bank • Demonstrate you can live within your means

  11. Fall Back Position • Multiple banking if possible • Cash is king: so must have a reserve • Robust projections on milk price, inputs interest rates etc. • If it goes wrong, what is exit strategy? • Understand taxation and welfare positions

  12. Overdraft • Typically 4-5% above loan rate • On a well run €25k overdraft facility costs about €1k.But badly run €3k+ • Utilise the full amount of overdraft for short time during the year • Adhere strictly to the 30 day rule.

  13. Leasing • Asset will usually satisfy security • Interest rate is fixed for term of loan • Early termination costly • Merchant/supplier based • Real cost is reduction in bargaining power • Can make use of it strategically

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