Do I need a loan?

Many new farmers lack the money to start up their business. But before applying for a loan, make sure it’s really necessary, writes Susan Pletts.

Many new farmers lack start-up capital to fund their operations. And as the business progresses, there will be times when cash flow is a problem, so bridging finance is needed. This could become more of a long-term borrowing as farmers also experience natural disasters, such as floods, drought or disease outbreaks among stock.

Export fruit farmers could have their crop rejected or fires could destroy years of growth, and there’s no insurance to cover these losses.It’s perfectly acceptable to borrow money to start up your business. If this is your first business, or if the business is risky, it will be difficult securing finance, and the interest rate might be very high, putting pressure on your overheads.

It’s also difficult to get funding to buy livestock, especially poultry. The animals or birds could die, leading to the business losing production, and the loan provider not being paid back. If you have a fixed asset that could be offered as collateral  (security) for a start-up loan, it’ll be easier to get finance. If you want to expand your business as there’s potential to increase production without increasing your overheads by too much, a loan could help.

This could be a medium- or long-term loan, depending on the ability of the business to repay the borrowed amount. A short-term cash flow problem can be fixed with “bridging” finance. As the word suggests, this is a quick loan to get you to the other side of your current difficulties. It usually takes the form of a bank overdraft until cash comes in from production.

A bank overdraft is when the account holder can draw money from a bank account that doesn’t have any funds in it. It’s expected to be paid back as soon as extra money is available. Most new farmers require a loan to buy a farm, unless they’re land claim beneficiaries. An access bond is the best account here, as it’s flexible.

Surplus cash can be paid into this account to lower the balance and bring the interest cost down. If the business suddenly needs cash, the money can be withdrawn and used. The bond account can be linked to the account the farmer uses daily, meaning there’s no need to get permission from the bank manager before drawing the money.

Beware of taking out a loan to pay off other loans – this means you’re facing disaster.Susan Pletts runs Wanyuka Consultants in KwaZulu-Natal, which provides various services, including farming training and mentorship for emerging farmers in KZN.

Contact her on 082 572 3724, or [email protected].