Sprout Ag Insight: Navigating Regional Investment Corporation (RIC) Loans

The Regional Investment Corporation (RIC) is a Federal Government-backed lender offering low-interest loans to farming businesses, helping many reduce interest expenses and improve cash flow. With the first wave of RIC loans transitioning from interest-only to principal and interest (P&I) repayments, it’s vital for borrowers to review their financial commitments and consider refinancing options.

Understanding the RIC Loan Structure:

• Term Overview: RIC loans are structured as 5 years interest-only, followed by 5 years of P&I repayments.
• Repayment Expectations: Borrowers must start repaying the principal after the initial 5 years. The repayment amounts may vary between borrowers, though principal repayments are expected.
• Limited Extensions: Options to extend interest-only terms with RIC are limited.

Why Review Your RIC Loan Now?

Many RIC borrowers will soon face their first principal repayments. This can impact cash flow significantly, particularly after challenging seasons such as droughts or poor harvests.

Sprout Ag has helped several clients refinance their RIC loans back to banks to extend interest-only periods. In some cases, clients also secured lower interest rates by consolidating loans and removing second mortgages tied to RIC. This strategy has provided much-needed cash flow relief and financial flexibility.

Sprout Ag’s Top Tips for RIC Borrowers:

1. Review Your Loan Terms:

Check when your RIC loan will switch to principal and interest repayments. Understanding the timeline is crucial for proactive financial planning.

2. Assess Cash Flow Impact:

Determine the principal repayment amount and how this will affect your operating budget. Be realistic about your ability to meet these obligations.

3. Consider Refinancing Options:

Explore refinancing your RIC loan back to a bank to secure extended interest-only terms and potentially lower interest rates. This can improve liquidity and reduce financial pressure.

Need Guidance?

Sprout Ag’s team of agribusiness finance experts can help you navigate the complexities of RIC loans, assess refinancing options, and optimise your financial strategy. Contact us today for tailored financial solutions designed for the unique challenges of agribusiness.

In the world of agricultural finance, one of the most common kitchen table discussions is around repaying debt—specifically, how and when the principal will be paid down. This conversation is not only frequent but also vital, as most farming operations are expected to repay their term debt fully over approximately 20 years. However, navigating these repayments effectively requires strategic planning, especially in the face of fluctuating cash flows and unpredictable seasons.

Many farm loans are set up as interest-only for the initial years, allowing cash to be allocated towards essential priorities like property improvements, building livestock numbers, or allowing time to stabilise the business. For new purchases, expansion, or succession planning, an interest-only period provides crucial breathing space for businesses to adjust and plan for a more substantial repayment load in the future.

When Principal Reductions Complicate Cash Flow

It’s not uncommon to see banks impose principal reduction requirements, even if the farm may not be in an optimal position to meet them. This approach can sometimes lead to a catch-22, where a principal reduction is made, only for the business to require an overdraft extension soon after to meet operational expenses. In this scenario, focusing cash flow on debt repayments at the expense of working capital can feel like “robbing Peter to pay Paul.”

For those managing higher levels of equipment finance, it’s essential that banks recognise this shorter-term debt is being steadily repaid. This may help to offset the need for additional term debt reductions, balancing the financial picture and avoiding undue strain on working capital.

Strategic Tips for Managing Principal Repayments

To make principal repayments work for your farming business, here are some key strategies:

1. Know Your Repayment Dates: Schedule and diarise repayment dates well in advance, allowing time to adjust your budget. Revisiting the budget months ahead of due dates can ensure that you’re financially prepared.
2. Question the Conditions: If your bank requires principal reductions, don’t hesitate to ask for the reasoning behind these conditions. Are they still relevant if your business position has evolved?
3. Consider Opportunity Costs: Sometimes, using cash flow to invest in other opportunities yields higher returns than repaying debt. Weighing up opportunity costs can help you determine if the cash would be better used elsewhere.
4. Prioritise Flexibility: Where possible, opt for long-term interest-only facilities with redraw options. This allows you to repay principal when it aligns with your cash flow and redraw if cash is needed later.
5. Shop Around for Options: A second opinion can provide valuable insight. We often see one bank insisting on principal reductions while another may offer an extended interest-only term. Exploring multiple banking options may reveal more favourable terms.

Ultimately, managing principal repayments is about balancing the need for financial progress with the reality of agricultural cash flow. Strategic planning and maintaining flexibility can help protect your business’s financial health while positioning you for growth and opportunity.

Cash Profit Feeds Your Family, Not Revenue or Turnover

As the cost of running a business continues to rise, the pressure on business owners, particularly those in the agricultural industry, is intensifying. At Sprout Agribusiness, we work with over 2,000 clients across the farming and Ag supply chain, and one consistent theme we’re seeing is the strain around working capital limits. Whether it’s machinery dealerships, grain businesses, or livestock producers, the struggle to manage costs effectively is impacting everyone.

The Rising Costs of Doing Business

One of the most concerning trends we’ve noticed is that pre-tax operating profits are dropping below 5% of revenue for many businesses. This decline isn’t due to lower revenues but rather a result of increasing costs that haven’t been managed early enough. While there is often a focus on production levels, turnover, and commodity prices—whether it’s livestock turnover, crop yields, or commodity prices—the reality is that rising costs are eating away at profits.

Cash Profit Over Turnover

As businesses scale and grow, they require more cash year after year. It’s crucial to understand that cash profit, not turnover, is what sustains your business and feeds your family. While high revenue numbers may look impressive, if your cash flow is tight and costs are climbing, your business could be headed for trouble.

At Sprout Agribusiness, we’ve seen that businesses that fail to stay on top of their “cash in bank” position and don’t continuously re-forecast are putting undue pressure on their banking limits. A sustainable profit, year in and year out, should always be the goal.

Top 5 Tips for Building Cash Profit

1. Set a Core Cash Target: Ensure you always have a clear cash profit target for your business.
2. Focus on Profitability, Not Turnover: Prioritize profits over revenue. A growing business needs more cash, not just higher turnover.
3. Know What’s Profitable: Identify what parts of your business truly drive profit. It’s not just about having the best-looking livestock or highest yields—it’s about what’s left in the bank.
4. Go Beyond Financial Statements: Don’t rely solely on your financial statements. Use a range of tools and insights to manage your cash flow and profitability.
5. Communicate Regularly: Collaborate with your entire team on a monthly basis to stay on top of your cash flow and ensure everyone understands the financial position of the business.

Need Help?

If managing your business’s cash flow feels overwhelming, or if you want expert advice on improving your profitability, contact your nearest Sprout Agribusiness advisor. We’re here to help you focus on what really matters—your cash profit.

As spring rolls around, many farmers find themselves in a familiar situation: pushing the limits of their banking facilities, particularly overdrafts. This time of year, especially for mixed farmers, can be one of the most financially stretched periods due to the timing of harvests, livestock management, and other essential farming operations.

For many in the industry, especially those involved in mixed farming operations, the spring season often marks the peak debt period. With winter crops typically set for harvest in November or December and payments not expected until January or February, cash flow can become tight. Similarly, livestock producers are often holding onto stock longer to maximise weight and, ultimately, the sale price. This approach results in more significant potential profits but also requires increased inputs in the lead-up, whether through additional feed, veterinary care, or other investments. The result? Many farmers find themselves running up against their overdraft limits or general banking constraints as they wait for the financial windfall of harvest or livestock sales.

In the past, a short-term overdraft increase would often serve as a solution for these farmers, providing the necessary financial breathing room to cover these additional expenses. However, as financial institutions have become slower in their turnaround times, with fewer staff on the ground to process requests, short-term fixes are becoming less viable.

At Sprout Agribusiness, we’ve adapted to these changing conditions by encouraging our clients to look beyond quick fixes. Instead, we advocate for more strategic financial planning—extending projections and planning out cash flow needs until the end of 2025. This approach not only provides immediate financial relief but also ensures farmers are prepared for future business scenarios and opportunities.

Best Practices for Requesting a Bank Limit Increase in Spring:

1. Take a Step Back for Long-Term Planning:

We know this is a busy time, but it’s essential to take a moment to assess your business’s needs, not just for the next few months but until the end of 2025. By extending your financial projections, you can anticipate future needs, making it easier to negotiate with your bank and secure the right facilities now, rather than scrambling for an increase later.

2. Factor in Opportunities:

Whether it’s trading livestock or taking advantage of an unexpected opportunity, it’s vital to ensure your banking limits can accommodate potential business growth. Consider these scenarios in your financial projections to avoid being caught off guard by your bank’s limitations.

3. Keep Your Cash Flow Template Active:

Understanding your cash flow on a month-to-month basis is critical. By keeping an active and live cash flow template, you’ll have a clear picture of your financial position, making it easier to explain to your bank why you need an increased limit. It will also help you make more informed decisions about when to request additional funds.

4. Prepare Comprehensive Documentation:

Before approaching your bank, gather all necessary information. This includes:

• – An updated Statement of Position to reflect your current assets and liabilities.
• – A cash flow forecast for the next 12-18 months.
• – Updated information from the ATO portal, especially if your bank relies on this for assessing your tax obligations.
• – Management figures for 2024 and a copy of your 2023 financial statements.

Having these documents readily available not only speeds up the process but also demonstrates to your bank that you’re prepared and proactive about your financial situation.

Why a Longer-Term Approach Works:

By planning ahead and factoring in various business scenarios, you can avoid constantly needing to request short-term overdraft increases. This approach helps build trust with your financial institution, showing them that you’ve considered all variables and are preparing for the long term. It also accounts for the slower turnaround times many banks are now experiencing, allowing you to secure the funds you need without the stress of last-minute applications.

Raising your farm’s banking limits doesn’t have to be a stressful experience. By taking a step back, assessing your long-term needs, and preparing all necessary documentation in advance, you can ensure your farm’s financial stability through spring and beyond. With the right approach, you’ll have the flexibility to take advantage of opportunities, whether that’s holding onto livestock for a better price or investing in next season’s crop. So, take the time now to set yourself up for success through 2025 and ensure that your banking facilities are equipped to support your farm’s growth.

To Fix or Not to Fix: Navigating the Interest Rate Dilemma as a Business Owner

In today’s financial landscape, you’re likely receiving numerous calls from bankers and so-called “interest rate specialists” urging you to fix your rates. As longer-term fixed rates continue to decline, the decision to lock in a rate or stay variable is more pressing than ever. But before making this crucial choice, there are several factors to consider.

Understanding the Market

The money markets, which typically set the tone for interest rates, have begun lowering their longer-term fixed rates. This trend is also reflected in term deposit rates. We’ve observed similar movements in countries like Canada and New Zealand, where central rates have seen reductions. These shifts suggest that the markets, often a reliable indicator, are anticipating further rate cuts. Banks and financial institutions are beginning to align with this outlook, signalling a potential downward trajectory in interest rates.

However, it’s important to remember that predicting inflation—and, by extension, interest rates—is an imperfect science. Even the Reserve Bank of Australia (RBA), with its vast resources and expert staff, has struggled to get it right in recent years. Their missteps in communication and delayed responses highlight the uncertainty that even the most informed institutions face.

The Interest Rate Debate

With the current movement in the money markets, particularly the pullback in longer-term fixed rates, the noise from interest rate specialists advocating for fixed rates is growing louder. As a business owner, how should you respond?

The Pros of Fixing Rates

1. Risk Management: Every business owner has a different tolerance for risk. Fixing your interest rates can offer peace of mind, allowing you to sleep easier at night knowing that your costs won’t spike unexpectedly.
2. Stable Cost Base: By locking in rates, you create a more predictable cost environment, which can lead to better financial planning and decision-making for your business.
3. Protection Against Rate Increases: Fixing your rates shields your business from the potential upper-side risks associated with variable rates. If interest rates rise, your costs remain stable, protecting your bottom line.

The Cons of Fixing Rates

1. Lack of Flexibility: Fixed rates often come with restrictions. If your business has surplus funds, you may not be able to offset those fixed rates as easily as with variable rates.
2. Impact on Succession Planning: If you’re planning for business succession, long-term fixed rates might complicate the process. It’s important to consider how these rates align with your future business plans.
3. Expansion Limitations: Fixed rates can also hinder your ability to expand. If your current bank can’t support your growth, the opportunity cost of being locked into a fixed rate may outweigh the benefits.
4. Bank Motivations: Lastly, consider whether your bank is encouraging fixed rates to genuinely support your business, or simply to secure you as a long-term client. It’s crucial to evaluate their intentions.

Seeking Alternative Perspectives

It’s wise to seek alternate views before making a decision. Some businesses that locked in rates at exceptionally low levels, such as 2.8%, benefited greatly, but these opportunities are rare and unpredictable. Even the RBA’s projections didn’t foresee such favorable conditions at the time.

In the end, whether to fix your interest rates or not is a decision that requires careful consideration of your business’s unique circumstances. Consult with trusted financial advisors, weigh the pros and cons, and make an informed choice that aligns with your risk tolerance and long-term goals.

At Sprout AG, we tender out between $600-800 million annually in agribusiness debt, positioning us as one of Australia’s largest independent advisors in the agribusiness finance sector. This extensive involvement provides us with unique insights into the agribusiness finance market, allowing us to identify key trends and help our clients make informed decisions.

Current Observations in the Agrifinance Marketplace

The Agrifinance market is dynamic, with several notable developments:

• One major bank has essentially stopped taking on new agricultural clients.
• Another major bank is undergoing its largest restructuring in history, resulting in clients receiving new points of contact.
• A regional bank with a long agribusiness history is being sold.
• Two new regional banks have become more competitive than ever.
• A large livestock finance funder is also being sold.
• Interest rates, driven by the RBA, have varied significantly between banks, leading to substantial cost differences for farming businesses.

Interest Rates and Client Costs

We advise our clients to anticipate potential rate increases for cash flow planning. While rate hikes are not certain, incorporating higher rates into budgets is a prudent risk management strategy. The general consensus is that interest rates will hover around current levels for the next twelve months, with minimal fluctuations either way.

There are two prevailing views on future rate movements:

1. Further increases may be necessary to align with global peers like England, Canada, and New Zealand.
2. Inflation control may suggest that the next rate change could be a decrease.

Regardless of these possibilities, businesses should prepare for slightly higher rates and adjust investments accordingly.

Service Levels and Digitalization

Despite overall industry growth, we observe a trend towards digital services and reduced face-to-face interactions. Agribusiness is unique, and understanding each financial statement’s story requires ag managers to engage directly on the farm.

Changing Suppliers and Client Placement

Our independent bank tender service involves preparing client information professionally and presenting it to the open market. This competitive process allows clients to choose their preferred bank or financier. We have noted a significant shift from major banks to regional players among our clients.

General Industry Trends

Our client base primarily consists of mixed farmers (sheep, cattle, wheat, barley, cotton). Cotton clients have reported satisfactory results, and dryland cropping programs have had a promising start this year. However, clients who purchased properties recently and focus on sheep enterprises are feeling the impact of higher interest rates and lower commodity prices for sheep and wool. These clients are restructuring to ensure their financing is fit for purpose, often converting to interest-only loans.

Three Tips for Procuring Your Ag Debt

1. Prepare Early: Start the process at least twelve months in advance.
2. Professional Preparation: Ensure your information is well-prepared and presented to make the best impression.
3. Thorough Process: Don’t just ask your existing provider for minor adjustments; engage in a comprehensive tender process.

For more information or assistance, please contact your local Sprout Agribusiness advisor.

Summary

We recommend tendering your banking business at least every three years. While this isn’t always about the best rates, it can have a significant financial impact, particularly for clients with over $2 million in debt.

At Sprout AG, we are committed to helping you navigate the complexities of agribusiness finance, ensuring you make the best decisions for your business’s future.

Leadership in Family Farming Businesses

Leadership always comes with its own set of consequences, especially within a family business. Balancing the natural instincts of being a parent with the demands of leading a successful enterprise requires a delicate touch. This is particularly true in family farming businesses, where the leader must navigate complex family relationships while ensuring the business thrives.

Navigating Dual Roles: Parent and Leader

In a family business, the challenge often lies in reconciling parenthood’s nurturing, coddling nature with the strategic, sometimes tough decision-making required in leadership. Good leadership in this context involves self-awareness about how you carry yourself, the mood you project, and the behaviours you reward.

The Growing Importance of Leadership

As family farming businesses grow larger and more financially complex, the importance of effective leadership becomes ever more critical. With up to four generations potentially involved, the ability to lead effectively can make or break the business. Leadership is about communication and making deliberate decisions that sometimes require putting aside natural family instincts for the greater good.

Beyond Execution: Working on the Business

Many business owners spend 99% of their time executing tasks and only 1% working on the business itself. However, the long-term sustainability of a farming business hinges not on external factors like weather or market prices but on the quality of leadership during the current generation. This leadership sets the tone for future success.

What Does Good Leadership Look Like?

Good leadership is a balance of hard and soft skills. It’s about fostering a positive culture within the family, excelling at family events, and ensuring robust documentation and processes are in place. This includes asset policies, employment policies, and clear operational guidelines. Professionalising the business is critical to leadership, and effective communication through various channels is essential.

The Impact of Your Leadership Shadow

Every leader casts a shadow that impacts the business and its culture. Your leadership style, communication methods, and ability to collaborate with family and team members significantly influence the business. Recognise that your generation’s leadership will have the most substantial impact on the business’s future.

Collaborative Leadership

Leadership doesn’t always mean leading from the front. It’s crucial to value the ideas and perspectives of family and team members. The next generation and younger team members often bring fresh views and different ways of processing information. Embracing these differences can strengthen the business.

Tips for Being a Good Leader in Your Family Farming Business

1. Acknowledge Your Leadership Role: Understand that your leadership has consequences and is vital for the business’s success.
2. Dedicate Time to Leadership: Balance execution with time spent working on the business. Most businesses need to focus more on strategic planning.
3. Establish a Communication Structure: Consistent communication is key. Use various platforms to keep everyone informed and engaged.
4. Be Mindful of Your Presence. Your attitude and behaviour are critical, and how you show up at work and with your family sets the tone.
5. Understand Your Leadership Impact: Recognise your leadership’s significant influence on the business’s future.

Leading a family farming business is a unique and challenging role. By balancing family instincts with strategic leadership, fostering a positive culture, and valuing collaborative efforts, you can ensure your business thrives for future generations.