Farmers turn to flexible financing to bridge cashflow gaps
With the prices of fuel, fertiliser, and animal feed and medicine, forecast to rise 15.2%, 14.6% and 7.6% respectively in 2017, alongside rising inflation costs it’s clear that the farming industry’s cashflow crisis is set to degenerate further this year. Farmers are already well aware of most strategies to mitigating the problem and aim to keep costs low, but what about some of the solutions they might not yet have considered? Alex Fenton, CEO and founder of GapCap, explores some of the different options available.
Owning a small business has never been easy but this is particularly true for the farming industry today. With a number of issues driving increasingly severe cash flow deficits, the agricultural industry’s concerns have now doubled in the light of Brexit and, more recently, the triggering of Article 50. With sources of EU funding at risk, farmers must turn to new means of financing to bridge the cashflow gap.
For many, current low farm gate prices – especially for milk – are a key driver of cash flow challenges. Having fallen dramatically since the 2013-14 high, farm gate prices look set to continue dropping. The weakened pound following Brexit has forced up the cost of imported feed, adding to cash flow problems. With the prices of fuel, fertiliser, feed and medicine for animals forecast to rise 15.2%, 14.6% and 7.6% respectively in 2017, maintaining cashflow is an increasingly uphill struggle. Indeed, in the sectors that are most effected – cereals, milk and pigs – incomes are dropping sharply.
The Basic Payment Scheme (BPS), the biggest of the European Union’s rural grants and payments to help the farming industry, has been used by many within the agricultural sector to bridge cashflow gaps. However, recently the Chief Executive of the Rural Payments Agency faced heavy criticism for delayed BPS payments to farmers, with some farmers still waiting for their 2015 claims to come through. Delays to BPS pay-outs have put even greater pressure on the sector’s cashflow problems. Further, as an EU grant, the continued roll out of BPS may not last long, with some expecting payments to come to end by 2020 now that Article 50 has been triggered.
Meanwhile, consistent long payment terms continue to create cash flow challenges. With some clients offering payment terms upwards of 90 days, many farming businesses find themselves struggling to make ends meet, particularly during times of peak demand – such as Easter.
As a result, farm borrowing has almost doubled in the past ten years. Research from The Prince’s Countryside Fund revealed that 17% of farms face major financial problems; whilst half of UK farms are no longer making a living from farming alone; and 20% generated a loss even before accounting for family labour and capital. As debt mounts up, many farmers are forced to further their debt by borrowing privately from family or friends, turn to payday loans, or delay payments to suppliers. Such late payments impact the entire rural economy, from vets to auction markets, the result being the reduction in available work, decreased income and potential staff redundancies.
Traditional finance may promise to be the answer for those struggling with cashflow and debt. However, the volatility of output prices and the seasonal nature of farming means that it is difficult to predict how long depression periods will last – and how much they will cost. Merchant credit, late payments and overdrafts may seem like acceptable short-term solutions, but these methods of financing are not sustainable: not only is the business unable to grow but eventually, patience will run out and demands for payment will roll in.
In order to patch the cash flow gap, many agricultural businesses have turned to selective invoice financing. Invoice financing allows businesses to raise cash against their invoices in 24 hours, be it regularly or just as a one-off. In this way, smaller recruitment firms can release cash when need dictates, allowing them to maintain supply to their clients, even during times of spiked demand.
For example, a company that provides arable farmers with innovative solutions to field cultivation problems sought out GapCap – the selective invoice financing company – to help grow their business. The company’s primary customer only offered 90-day payment terms, which seriously restricted growth: though keen to manufacture and sell eight machines over the quarter, the long payment terms kept production down to just five machines. But, in providing a flexible finance solution, GapCap helped facilitate the production and sale of eleven machines, allowing the company to exceed revenue projection by 60%.
With Brexit fluctuations and EU funding at risk now that Article 50 has been triggered, the farming industry needs to think long term. These financial pressures aren’t going to go away, and farm businesses need to improve their skills in business planning and financial management. There are a number of online tools that identify and evaluate cost of production and efficiency savings, or business planning training. Equipped with a clearer understanding of how to mitigate cashflow concerns and a knowledge of the different alternative financing solutions available, the agricultural industry will be better able to survive the Brexit storm.