More farmers are expected to look towards alternative income streams as farm payments change, Oxbury Bank’s Tim Coates spoke to Rebecca Jordan about financing farm diversification.
Total income from farm diversified activities in 2019/20 was £734 million, according to Defra’s Farm Business Survey. And that figure is only likely to grow. Across all farms, income from diversified enterprises accounted for 28 per cent of total farm business income. The main diversification was letting outbuildings for non-farming use.
And with the gradual withdrawal of the Basic Payment Scheme, more farmers are likely to consider alternative income streams, according to Tim Coates, co-founder of agricultural bank Oxbury Bank.
He says: “The first step any farmer should explore when considering diversifying is whether the intended project is adding sustainability to their farming operation, rather than diversifying for the sake of it.
Finance for farm diversification
“And if that application for financial help is to be successful the business plan should be fully developed, well-thought through and show clear understanding of the plan’s objectives and projections.”
He says some applications were declined because they were not detailed enough, with banks unwilling to take a risk.
“However, if there is potential there is an opportunity to submit an update,” he says. “Before making a decision the lender will always need to understand the whole of the farm’s business operation. That will tell it about the holistic and historic nature of the business and give an indication of its micro-management.”
He adds they visited every farm submitting an application, finding it important to meet everyone involved in the business.
“In some cases, where there is a younger generation waiting in the wings, diversification is a great way of giving them something different to contribute to the family business,” Mr Coates says.
Farm businesses can diversify at many levels. On a small scale, introducing another enterprise – such as livestock to an arable set up – can provide a holistic benefit to the business as a whole. If a major development such as a farm shop will not enhance the bottom line once established, Mr Coates says there is a middle ground in improving efficiency.
He gave the example of a poultry farmer putting up a new shed and installing an alternative energy supply.
Once an application is accepted, there are several financial options. Long-term loans can stretch to 25 years. In some cases, the lender can establish an interest-only period when higher expenditure is required to establish the business before generating regular income.
Seasonal repayments reflecting specific periods of income flow are attractive to enterprises that are dependent on harvests, such as apples for cider or juice.
“Evolving from that concept is an input finance facility. This is a credit service whereby a farmer can buy inputs when required but pay when it suits the business’ cashflow,” he says. “The bank underwrites the credit to fund the purchases with an approved supplier.”
Mr Coates adds he believes there could be some ’good grants’ available in the coming years to help farms diversify but, with scant information available, he has no idea when and what.
He says those who want to adapt will find the way to make their business work when subsidies are phased out.
“By then farm diversification will play a major part in keeping the rural economy going because farmers are at the heart of its existence.”