LAST month’s popular finance webinar focused on low interest loans available through the Regional Investment Corporation generated a flurry of producer questions on eligibility, security, terms and related topics.
The webinar provided an overview on the new RIC agency and the low interest loans they have on offer.
A large audience of producers and advisors from all states tuned in to hear from RIC’s business development manager, Craig Turner, who discussed the opportunities available through the RIC to deal with drought, invest to improve on-farm profitability and recover from the floods in northern Queensland.
He said RIC loans were available to primary producers whose enterprise had been impacted by circumstances beyond their control to refinance commercial debt, borrow to undertake productivity improvements or assist with working capital requirements. The low interest rates, currently 3.11pc, initial five years interest only period with no fees and charges, and provision for the remaining debt to be returned to a bank after 10 years received a positive response from those on-line.
Attendees were keen to understand the position of the RIC when it came to the security for the loans. Mr Turner explained that the RIC does not have pre-determined security levels, nor a policy on preferred security position. Instead the RIC looked to support applicants to the best of their ability and worked with commercial lenders to find the most suitable security position to provide loans to benefit an applicant’s business.
Second mortgages were quite acceptable to the RIC, he said.
Several attendees sought to clarify how debts held in overdrafts and all-in-one facilities would be treated as ‘eligible debt’ in determining the amount to be borrowed from the RIC.
The RIC use the credit limit in all-in-one facilities as the basis in determining how much can be lent, Mr Turner said. For overdrafts any ‘hardcore’ debt (i.e. a level the overdraft balance rarely falls below) could be refinanced and classified as eligible debt.
Some participants asked questions about concessional loans held from previous Commonwealth programs or state schemes. The RIC confirmed these loans could be refinanced through RIC loans. Importantly, applicants had to have at least 50pc of their debt with commercial lenders when applying for the loan.
The opportunity to refinance drought or dairy assistance loans provides an additional interest only period for producers still impacted by poor seasonal conditions or other factor beyond their control.
The Regional Investment Corporation provides primary producers with flexible options to finance their operations and build their profitability and productivity.
Readers can access the recorded version of the webinar via this link
RIC’s responses to webinar participants’ questions:
Webinar participants asked so many questions during last month’s session with RIC’s Craig Turner that time did not allow for them all to be answered.
Mr Turner has now gone through the questions, providing the responses below:
Q: A number of questions about if overdrafts are considered eligible commercial debt including:
- Does commercial debt include overdraft limits or just term loans?
- What is the logic of overdraft debt not being considered commercial debt?
- Where there is long term core debt in the overdraft of a business, can that be aggregated into eligible debt?
A: Each application is worked through on a case-by-case basis to ensure maximum assistance in accordance with loan guidelines.
Hardcore debt within an overdraft is considered eligible debt. An applicant should demonstrate through statements and bank commentary the minimum balance of the overdraft in the past two years.
Q: How is a Line of Credit type loan (for example, Rabo ‘All in one’) treated with regard to eligibility?
A: Line of Credit loans, like Rabobank’s ‘All in one’ accounts are considered eligible debt. Generally, the facility credit limit is used for determining the amount of eligible debt. Rural Bank’s ‘AgriManager’ is also treated the same way.
Q: Does a commercial lender have to be a bank and does the commercial loan term have to be for a minimum period?
A: Eligible debt is debt established upon commercial terms, interest rates and conditions. Therefore, the lender may be a financial institution, family or another third party provided the above definition is met. There is no minimum period for a loan stipulated. While not specifically stated, bridging finance would not generally be considered unless it was converted to a term loan. It is also important to remember that support of your commercial lender is required to access our loans.
Q: Can an existing livestock loan with a stock agent be aggregated into eligible debt?
A: If the loan is established on commercial terms and conditions, then yes it would be eligible. Off-balance sheet loans where the cattle are owned by a stock agent and the grazier is liable for the debt, are not considered commercial debt.
Q: Do I need to maintain 50% commercial debt over the life of the RIC loan? Are there any restrictions if I pay off the debt after a RIC loan has been granted?
A: Once the loan with us is established, there is no requirement to keep the exposure to commercial debt in balance with the debt with us – just as there is no requirement for primary producers to maintain their commercial loans with the same financier that existed at the time of establishing a RIC loan. It should be noted that our loans are designed to provide a farm business with increased working capital and to allow the enterprise to return and ultimately increase their viability and profitability. It is not envisaged that bulk reductions in commercial debt would occur in the short-term after receiving a RIC loan.
Q. Is 50% of lending with commercial lender only from Day 1 of RIC loan. i.e. If my commercial lender requires principal repayment and debt is not 50/50 at year 5 is that acceptable?
A: There may be requirements over time to make bulk reductions to commercial debt and the provision of a RIC loan should make an enterprise stronger and improve viability and profitability to allow this to occur. Our loans are there to support farm businesses that have been impacted by conditions outside their control so we expect your commercial lender will also be supportive during this time. Refinancing up to 50% of commercial debt generally addresses a commercial lender’s requirements for a reduction in principal debt.
Q. For refinance, does the original purpose of the loan matter? For example, if some existing business debt was for non-rural or investment purposes, can this debt be refinanced?
A: The loans being refinanced should be those established by the farm business. If over time your financier has consolidated debts attributable to the primary production enterprise and they are established on commercial terms, then this debt can be refinanced. Investment or housing loans cannot be refinanced. Please note there are consumer covenants attributable to housing loans that preclude the RIC from refinancing these types of loans, furthermore being a consumer loan a bank cannot agree to refinance in the future.
Q. Can I refinance other government debt, for example dairy debt from Murray Goulburn’s price down turn three years ago?
A: Yes, the Dairy Recovery Concessional Loan is an eligible Commonwealth Loan for refinancing with us.
Q. If I have a Rural Assistance Authority loan (not RIC) does that count as part of the 50% I’m allowed to borrow?
A: A concessional loan provided by a state authority e.g. Rural Assistance Authority can be refinanced with us, however the farm business must have commercial debt equal to or more than the amount held in government-funded concessional loans. For example, if an enterprise has $1.2 million in commercial debt and $800k in a concessional government loan, we could refinance $1 million, provided the remaining $1 million remains as commercial debt. Ultimately a RIC loan must be no more than the level of commercial debt held at time of applying.
A number of questions were asked around security including:
- What security is required to support the RIC borrowings. What LVR is required for borrowings? Any indication on equity % required to be eligible?
- LVR (Max shading) determination and priority
- Does CPI apply? Do you use independent valuers? Will you use 2nd mortgage on existing land if our current commercial provider has first mortgage?
- Do you lend as 2nd mortgage or do you always have to be primary mortgage only?
A: We will look to support applicants to the best of our ability and will work with your commercial lender to find the most suitable security position to allow us to provide a loan to benefit your business.
We do not have pre-determined security levels nor a policy on preferred security position. We will look at second or third mortgages if they are available and provide us with the best opportunity to assist you. Our loans require drought/business plans along with financial information. When looking at equity levels we will consider the previous performance of your operation, the current circumstances, the bank’s support and your plans. Security valuations may be required, and you may be required to pay for a valuation. If an independent valuation is available, please provide this with your application.
A number of questions were asked around loan terms and conditions, including:
Can it be principal and interest for entire period? If not, rate/overall cost will be compromised by interest only period?
If the interest only rate for 5yrs is ~3.31% what will the principal and interest rate be in theory for the remaining 5 yr period?
Will the interest rate be fixed at time of application approval?
A: Our interest rate is a variable rate reviewed every six months on 1 August and 1 February, so the rate may alter every six months in line with that. The rate is based on a rolling 10-year bond rate. Our loans are designed to provide breathing space for a farm business impacted financially due to events beyond its control. We expect conditions to improve within five years which is why the interest only period is set for five years only. We calculate the principal and interest repayments required in the next five years of the loan over a longer term to allow additional business cash flow. We expect you’ll refinance remaining debt with a commercial lender at the end of the loan term.
Q: Are there ongoing reporting requirements, throughout the loan period?
A: We may undertake an annual review to ensure the farm business has the capacity to continue to meet the terms and conditions of our loan. We are also keen to see the outcomes from the finance provided and how it makes a difference to your resilience and profitability. Clients will receive two months’ notice of the need to supply information for an annual review.
Q. How long does the application take to be approved after submission? You indicate 25 business days. In my experience, timeframes are longer.
A: Once all information is supplied, we endeavour to have a decision within 25 days. It is important that applicants and their advisers provide everything we ask for in the document checklist and ensure their application is complete before sending it to us. We cannot begin assessing an application until we have all the relevant documents.
Q. I have heard that banks may raise interest / margin rates on remaining funds if a farmer takes a RIC loan?
A: There is a possibility that banks will re-rate a client based on their level of debt and products with them. However, our loans are there to provide primary producers with the ability to deal with conditions beyond their control and to become more profitable and financially resilient. We would be disappointed if commercial lenders took advantage of a client obtaining more favourable terms for 50% of their debt, especially as it’s improving their long-term profitability and ultimately their ongoing relationship with a commercial lender. In our experience, banks want their clients to thrive and therefore we believe that as we work more with the banks this scenario will not occur. Importantly, you should speak with your adviser to ensure you are utilising the best financial solution for your business.
Q. Are commercial lenders in favour of RIC’s loan and are they happy for us to refinance through the RIC?
A: Many of the commercial lenders we’ve spoken with have been very supportive of the opportunity our loans afford their clients. In the 2018-19 financial year we’ve decisioned 212 loans. Of these, we’ve approved 166 loans to the value of over $155 million with all those clients having the support of their bank. Importantly, more funds had been approved through the state-administered Commonwealth concessional loans prior to the RIC being established, and again these farm businesses received commercial lender support.
Q. How flexible is RIC with a farmer who decides to take on further off farm income which may mean he earns more than 50% of his income from off farm employment?
A: Under normal circumstances at least one member of the farm business must spend 75% of time and earn 50% of their income from the business. You are eligible to apply as long as one member of the business meets these criteria.
Remember you only have to earn 50% of your income from the farm business under normal circumstances. We understand that sometimes you may earn more income off-farm, and that’s ok.
Q. For the Restocking and Replanting Loan (which is not yet available), the clients need to get the application in early so they are ready for when the drought breaks, you mentioned 6 months, how long can they keep extending until the drought breaks?
A: We will work directly with clients to assist wherever possible if seasonal conditions do not improve in the expected period. It may be prudent for applicants to consider using the RIC loan for refinancing and obtain the immediate benefit from this and utilise their bank’s support to finance their restocking or replanting.
Q. With the Drought Loan for replanting, how far do you push the “viability” when some of these farms are going to have missed out on two or three crops and the banks may not want to extend? Does this then mean they are not viable, or will this Drought Loan possibly be used for this situation?
A. We understand that drought can be prolonged therefore it may be prudent to supply financials for years prior to the past couple to support year in year out (YIYO) estimates. The Drought Loan can assist in providing working capital where the bank is at the extent of their limits and/or refinance commercial debt to ease cashflow constraints.
Q. How does the restocking payment work? If the client finds the stock to purchase and the loan is approved, what happens next in order to see the sale made?
A. Clients are able to draw down loans in up to three tranches. Payment will be on presentation of invoice/ receipt and instruction from client to either deposit to their account for reimbursement or pay supplier/agent directly.
If you haven’t been affected by drought but want to access RIC funds for drought preparedness, do you still need to have suffered financially for 1-2 years?
A. Yes, you still need to demonstrate two years impact or two years cumulative impact either occurring in the past five years or impacting now and into the future to meet the guideline requirement of financial need.
Q. Can you buy equipment to feed the livestock more efficiently like a mixing wagon that can mix different commodities?
A. Absolutely, fodder management and investing in more efficient machinery and systems fits very well with the purpose of the both the Drought Loan and Farm Investment Loan.
Q. I am not sure of the purpose of the first two eligibility requirements for a Farm Investment Loan, those around supplying overseas and interstate markets?
A: Our Farm Investment loan is available to help eligible farm businesses build and maintain diversity in the markets they supply – both at home and overseas. Our loans aim to best deliver the government’s objectives to make farm businesses stronger, more resilient and more profitable in the long-term.
We don’t expect it will be difficult for farmers to demonstrate they’re selling into domestic or international markets. There are good examples outlined in the guidelines.
Q. What about a young dairy enterprise whose only drought impact is increases in cost of purchased grain and fodder and wants to purchase more land to reduce reliance on grain/ fodder inputs. Would the RIC support this?
A. The Farm Investment Loan is applicable in this situation. The purpose in the question set out in the above question addresses drought preparedness and long-term viability, we encourage you to speak with us further to discuss your situation.
Q. Can the Farm Investment Loan be used to buy more land?
A. Yes, if the purchase is supporting enterprise build-up, expansion of existing operations or diversification that allow for an improvement in productivity and profitability.
Q. Any news on the Coalition pre-election promise of AgriStarter Loans to help new/young farmers purchase their first property or to buy out other family members in the farm partnership?
A. AgriStarter is currently being developed and we expect it will be available prior to Christmas. If you have an interest in this loan, call us on 1800 875 675 or email [email protected] and register your name and contact details and we’ll let you know when it becomes available.
Q. Does the RIC cash flow budget template have to be used in the application?
A. The template we provide is just for your convenience if you don’t already have one available. It’s not mandatory that this template is used.
Q. Can we get the application form in Word version?
A. We have a new, shorter and simpler to use application form now available. It is a fillable PDF, which can be completed online, saved and printed out to sign.
Mr Turner said importantly, the ongoing message for any primary producer considering a low interest loan from the Regional Investment Corporation was don’t self-assess. Producers can call 1800 875 675 to discuss RIC’s suite of products or visit the website www.ric.gov.au