With many markets remaining volatile and an unwelcome tax bill due soon, now is an important time for farming businesses to ensure they have enough working capital to see them through the short to medium term says Andrew Connah from the Agricultural Mortgage Corporation (AMC).

As tough as it may be to assess the financial prospects for the year ahead and beyond, he says it has never been more important to fully understand cash requirements.

“The first step is to budget honestly and be realistic with your projections and assumptions,” says Andrew. “Market conditions may be largely out of your control, but while you will need to capitalise on the conditions as best you can, being over-optimistic on the maths will not help meet cash flow and working capital needs.” He says many faced with a tricky cash-flow projection will automatically look to extend their overdraft to provide trading cash. “But if you are nearing your limit or have a poor set of accounts to take into your review, you could be at a disadvantage; under these circumstances, securing the best terms or even obtaining the cash you need could be a challenge,” he warns.

Some farmers instead choose to secure longer term working capital facilities where the facility limit, interest rate margin and annual fee can be agreed at the outset for up to five years. This has the advantage of providing some peace of mind around managing cash and costs as well as removing the need for an annual review of accounts.

With historically low interest rates, it’s also still possible to take out a 30-year loan at some of the lowest fixed interest rates in recent times, adds Andrew.

“Although this could be a sensible option for some, it is important not to be dazzled by the rates. Once a fixed rate is entered into, the flexibility to repay the loan early is often lost. As such it may be that for some, an interest-only long term loan on a variable rate agreement with very flexible repayment terms is what’s needed instead.”

Independent advice about the best options for your circumstances should always form part of the decision process.

“Farming has got used to higher returns and low rates, so people are tending to tie themselves into shorter-term paybacks. This is fine as long as things are good, but gives you no wriggle room if you hit a tricky patch.

“A golden rule of thumb is to borrow over as long as possible to minimise the annual commitment, but repay as quickly as you can to minimise the total interest re-paid. That’s why flexibility within loan agreements is so important – making sure they meet your needs and help the business over the longer term.”