Part 4: Financing the future
When it comes to funding innovation, many farmers still turn to a familiar source, their bank.
The good news, says Justin Audcent, RSM Partner, Corporate Finance, is the banks are not only open to financing new technology and automation, they are encouraging it – particularly when it supports the achievement of carbon reduction and other sustainability goals.
That innovation can take many forms, from solar power and electrified equipment to carbon capture projects and precision agriculture technology. A number of major banks offer interest rate discounts and incentives for sustainable ventures and seek to provide flexible loan terms that match the expected cash flow returns.
Loan terms could be anything from three years for smaller projects to 10 years or more for large-scale investment in farm-wide automation systems.
Justin Audcent
“The banks are keen to lend. They have a large exposure to agriculture and want to support the clients that are forward-looking – the innovators.”
Sustainability linked loans
One of the biggest developments in recent years has been the rise of sustainability-linked loans.
These include “green loans”, term loans at discounted interest rates where the purpose is to fund a project that delivers carbon reduction or other sustainability benefits.
However, interest rate discounts may also be available for a wider range of borrowings – including asset finance and working capital funding – if a farming business meets certain agreed key performance indicators (KPIs).
“A number of the major banks have these arrangements which are linked to quantifiable, forward-looking KPIs,” Audcent says. “If you meet those KPIs, it translates directly into a discount on your standard interest rate.” He adds that “on-farm automation often delivers not only efficiency and cost benefits, but also contributes to achieving sustainability goals that can form part of the KPI framework”.
KPIs are negotiated on a case-by-case basis but may include measures in relation to:
Water use reduction
Lowering water consumption through precision irrigation or recycling systems
Carbon capture and emissions reduction
Implementing soil carbon projects or reducing diesel use through solar energy installations, battery storage and electrified farm machinery
Chemical use reduction
Cutting back on fertilisers and pesticides through targeted spraying
Building the business case
While demonstrable sustainability outcomes are important, Audcent stresses the fundamentals still apply when submitting an application for funding.
Banks expect borrowers to demonstrate how the investment will generate cost savings – in labour, energy, fertiliser or other input costs – or increase revenue, for instance through improved quality or higher yields. They will want to see projected cash flows indicating the business can comfortably cover interest and repayments and that the investment pays for itself within a realistic timeframe.
With agriculture subject to a number of uncontrollable factors, a robust business case should also consider the ability to meet loan repayments in various ‘downside’ scenarios. In this context, risk management measures, including insurance and contingency planning, will also be important in the bank’s evaluation of a loan application.
Banks view innovation and sustainability as part of their overall credit risk assessment, pref rring to back farmers who are improving soil health, reducing inputs and investing in energy efficiency.
“They want clients that are doing the right thing – running robust, efficient businesses that can survive and be successful into the future,” Audcent says.
“At the end of the day, there has to be a robust business case,” he says. “If you’re borrowing money for automation or other technology investments, the project needs to deliver a clear benefit in terms of profitability and cash flow.”
Beyond the banks
While bank debt remains the default funding route for most family farms, larger agribusinesses, especially those involved in processing and manufacturing, have accessed other sources of funding, including project finance and private equity.
Audcent cites one example where RSM helped raise $40 million of project finance for a new animal feed mill.
“We raised $20 million of debt funding from a major bank and a further $20 million of equity funding from private investors. It was a case where the project stacked up from a commercial and financial perspective – all the pieces were in place except the capital,” he says. “We worked with the founders to derisk the project so far as practicable and came up with a funding structure that could deliver the returns required by everyone.”
That type of structure isn’t common in traditional farming, however, where family ownership and control are often paramount. “Most family-owned farms don’t want external investors – it’s about maintaining control. They’ll usually look for debt funding instead.”
Nonetheless, Audcent highlights the growing role of private debt funds as an alternative to the major banks. While not all such funds will lend to the sector, a number have a specific focus on lending to agribusiness. They typically have more flexibility in structuring debt arrangements, including repayment profiles. However, there is generally a higher lending margin than for a standard bank term loan.
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