Seize the chance while you can

Wise family farm and business borrowers will use this time while banks are not chasing up arrears on loans, to extend their loan period with the right to pay back early if able to.

If they are lucky enough to be showing good profits due to high prices then it may be the time to send the bank some financial statements.

We could be in the lull before the storm. It is easier to obtain better treatment then than if you seek it in the eye of the storm as people often do. Forward planning pays. Remember that interest is not deferred when repayments are.

Should you need a hand do not hesitate to call us on 0428 417 496. GBAC Advisory has been helping people manage their bank loans since de-regulation in 1987.

Being a retired Chartered Accountant and CPA, having run my own sheep and cattle properties, hire companies and real estate developments I know how good it is to have your loans always under your own control.

Never put up with bank abuse and remember that in terms of loan consultants you generally get what you pay for.

We have some very special tools for making banks play ball.

The very best way to turn farm debt into farm profit – Hint No 10.

The very best way to turn farm debt into profit is by having some of it written off by the bank.

It was one of the NSW Rural Financial Counsellors who was referring work to me some 30 years ago who first pointed me in the right direction. Then with a bit of digging I discovered what should have been obvious.

We all know that the fruit shop throws out bad fruit and the bakery throws outHay stale bread. What I had never thought about was what moneylenders did with loans that go bad. I wondered what would make a loan go bad. Default by the borrower was one way. Default by the lender might be another.

Of course banks are making billions today, so losses on 5% of their loans  that “go bad” are well and truly covered by the massive profits they earn on  the other 95%. When I pressed bankers really hard on business, farm, home and credit card debt, I found that they would write some of the debt if they had good reason to. My first write-offs related to Swiss franc loans based on totally negligent bank advice. They grew with exchange rate variations. After months of work one bank made a very large concession to settle the debt. Then I was approached by a couple with a $20,000 credit card debt they could not repay. After some persuasion the card company kindly wrote off $11,000.

Debt converted to profit is usually debt that should not be there at all. It is a question of identifying it and convincing the bank that it will cost it a lot more than it is worth to recover it. For example, if  the amount of debt that has been manufactured by the lender is $500,000 but the lender will likely lose $1m in the process of trying to collect it, the bank would be better off doing the right thing and writing it off.

Back in the bush my firm, GBAC worked for some months on a large farm loan and found that in the end the bank was happy to write off 20% of it so the borrowers could refinance elsewhere. The farmers made more money that way than they had in the previous five years of farming.

We have had 50% written of for a grain grower and 100% for a city based business. Of course it is not simple. Moneylenders will fight with their last breath to squeeze another dollar out of their borrowers. Big banks are a lot better than fringe lenders who might break your legs as part of the recovery process. Our Votergram campaigns in Parliament helped bring on the Royal Commission. But big banks led by directors with no morals at all have just been given penalties, whereas anyone else would be put in gaol for the amounts they have stolen.

However, our firm has now had 40 years of persuading banks to write off debt. Quite a few lawyers and many shysters have followed us into the “bank negotiator” field. Some leave the borrowers worse off in the long run. That particularly applies to farm loans because city based lawyers or brokers who get into it, frequently have no idea of why the farm debts were in trouble in the first place. Often they just consolidate loans into one place which can be the very worst option for a borrower who is battling.

Some banks do fight on, determined to keep every precious dollar they can, but persistence pays. Some bank CEOs, on the other hand, are really good and when confronted with dishonest practices within their bank move quickly to write of the amounts dishonestly obtained.

Ten ways to turn farm debt into farm profit – Hint No

Fake Authority

If you have been badly treated by your bank, particularly in connection with a farm loan (or a business loan for that matter) you may have tried to obtain help from the Australian Financial Complaints Authority, ASIC or the ACCC.

You may also have not received any constructive help at all. ASIC and ACCC are not likely to obtain any cash benefits for you to compensate for what the bank has done to you. They both have a multitude of tasks and quite limited resources.

The Australian Financial Complaints Authority (AFCA) sounds as though it is a government body, but it is not that at all. It is in fact a body owned by the finance industry itself, for the benefit of the finance industry. It is self regulation. It acts effectively against minor players doing minor wrongs, but when it comes to banks robbing borrowers of hundreds of thousands of dollars it is hopeless. It sides with the bank and does not have the authority to rectify major bank fraud or compensate borrowers for very significant losses.

Bank Fraud

The most common fraud by banks on customers is in contravention of the Banking Act and if the debt is only a few million dollars, also in contravention of the National Consumer Credit Protection Act. This fraud is often described as the “Debt Trap” or a “Ponzi Loan”, meaning a loan that can only be serviced by taking out more loans to cover the interest and charges. It involves offering to customers loans that can be seen by a skilled banker to be unaffordable by those customers. These affect the majority of borrowers who are not accountants or economists. They are skilled in their own field like farming, grazing, breeding, horticulture or some other form of agribusiness but not skilled in finance or debt management.

If you find that you have run into trouble paying your loan on time for an extended period, the chances are that you have been tricked into the Debt Trap and given a loan that is unsuitable for you. The Banking Royal Commission has revealed how seemingly respectable banks have robbed customers blind.

It is relatively easy when applying for a loan to obtain one that is completely suitable for you, but that will probably not deliver as much profit to the bank, so the banker will not suggest it to you.

Weather

I am a farmer and know how farmers think. Farmers are optimists. They have to be, in a business that is so weather-dependent. That means that when asked to forecast their future yields they err on the high side. A qualified accountant like myself (retired FCA, CPA) knows that forecasts are like dreams and budgets can be plucked out of the air with no realistic foundation at all. A farmer will always estimate crop yield at the best rate likely to be achieved and yet the result is like spinning a chocolate wheel depending on if and when it rains. Sheep and cattle breeders can fairly accurately estimate their lambing or calving rates but they cannot accurately predict prices, floods or droughts.

It is these unknowns that allow their forecasts to often suggest that they can carry more debt that they can in reality. Banks who have been lending to farmers for over 100 years in Australia have a mountain of statistics on farm profitability in every region of the country for every type of farm. They can easily see what level of debt is affordable and what is not. The more reputable banks have become more careful since the government introduced “responsible lending laws”, but the government is looking to relax those.

A common trap used by banks is to have farmers produce cash flow forecasts on which their ability to service the loan will be assessed. However, cash flow can be manipulated by sale, for instance of livestock. Simply put, a beef cattle producer can increase cash flow in a three year period easily by selling more heifers and cows. However the future calvings will fall correspondingly and so will both cash flow and profits in the next few years. Wise farmers will do their own profit forecasts as well as the cash flows. Breeders are assets and it does not help loan servicing to sell off assets that produce the profits. The cash flow error leads many farmers to convert annual farm profits into debt for themselves and profit for the bank,  because when profits fall they have to borrow more money to keep on operating.

Challenging the bank

So the 9th hint in turning farm debt into farm profit is to consult a firm like GBAC Advisory to do battle with the bank for you and knock your loan into shape.

It is not really a job for the rural financial counsellors except in the sense that they can be a great deal of assistance in helping you to do your budgets and understand your financial statements. GBAC has done a lot of work in conjunction with Rural Financial Counsellors. However they have two limitations when large non-performing loans are concerned.

Firstly they are not generally qualified accountants and although they will know how to read and interpret the statements prepared by your tax consultant they will not know the many accounting pitfalls that can turn otherwise correct financial statements into a false picture of operations.

The second limitation Rural Financial Counsellors have is that of necessity they develop a quite close relationship with the banking executives in town and would not want to offend them in any way.

We, on the other hand, have seen far too many families suffer and lose or face losing, their homes and farms because of dishonest banking practices. We have  no qualms whatsoever about tackling the bank and raising inappropriate or unfair practices with the bank directors or Members of Parliament.

Regulation

Before de-regulation by the Federal Government in the1980’s, bankers made modest profits by serving the needs of their customers and guiding them on their finances. In particular they ensured that a customer would not be offered a loan that they could not afford.

After deregulation, bankers discovered that if they offered more risky loans most borrowers would put in a supreme effort to service them and in most cases they would succeed by working harder and earning more money or by drastically cutting their expenditure pattern.

But in farming that is often not possible. Extravagant living is unusual in the bush a good way from town. Output is largely determined by the size of the farm and what it will carry.  The unseen issue by a bank risk manager is the weather. Flood fire and drought can destroy a year’s profit without even trying. A good season can, as Dorothea McKellar would can “ can pay us back threefold.” For the farm without debt that works okay, but for the one with a bank loan the bad season means penalty interest rates and extra charges just at the time when loan repayments cannot be made at all and the overdraft has blown out to beyond its maximum. That increases the debt in a cumulative way that cannot mostly be undone by the next good season which might be five year away.

Act Early

What works best is the farm borrower who engages us for a very brief and inexpensive annual review of their loans and profitability right from day one.  In fact many use us to negotiate a more suitable loan in the first place. The old saying “a stitch in time saves nine” is never more applicable that in loan management. A debt problem can be easily nipped in the bud in the year that it arises. Ten years later when the bank has appointed a receiver because the debt has multiplied beyond rational belief, it can often only be solved by a no-holds- barred, knock-‘em -down-drag-‘em -out battle with the bank.  It is not just stitches that are saved then, but dollars, farms, happiness and mental health.

For those who do not see the problem coming and are victims of bad seasons or government policies, we can offer good options.

More about that in Hint No 10

Ten ways to turn farm debt into farm profit Hint No 7 – Watch and record the bank

Watch and record for future reference anything the bank does that you think is not in your interest  or is unfair. When offering home loans banks are usually very helpful. That is often the high point in the relationship. After that, once it has security rights to sell your property if you do not obey loan terms, the lender is in the box seat.

It is not unusual for conflicts to arise. Risk management in banks is no longer handled at local branches and in fact may be handled Interstate or overseas. Therefore the person in charge of collecting regular payments, if in fact there is any person involved rather than a computer, may not have any idea of changed circumstances affecting your farm. A computer certainly will not!

Even if they are in your capital city they still may have no idea of weather events, government policy or commodity price changes that could affect your ability to manage the debt. When GBAC advisory handles loan applications for clients we try to ensure that in the loan document the farmer has covered most eventualities.

If serious problems or differences of opinion arise between you and the bank and you want an advocate like GBAC to arrange a favourable settlement with the bank for you so that you can refinance your loan elsewhere, we need to know all that the bank has done wrong. Then it will talk turkey. What often happens is that the bank has detailed records of everything the borrower and the bank have done throughout the loan, whilst the borrower has no records at all.

Keep a loan diary from the time you accept the loan to the time you clear it and claim your title deeds back.

Ten ways to turn farm debt into farm profit – Hint 6 – Make extra loan repayments

Make extra loan repayments whenever you can. Sometimes you may be able to make double or triple regular repayments for a few good years.

To do that, first when signing up for a loan, make sure you have the ability to make early repayments without penalty.

In a low interest environment it is not that you will save a heap of interest as would be the case when interest rates are high, but that you will clear your debt and have clear title to your farm sooner. That dramatically reduces the risk of foreclosure and you losing the farm. Having your own title deeds safely in a deed box at home is a good thing.

Bank charges on loans also eat up farm profits just as interest does. But nothing eats up farm profits like the worry of dealing with a defaulting loan with the bank constantly on your back.

With interest rates around 5% or less, it is good to remember that not so long ago they rose to 24%.

Once debt is cleared, it is possible to concentrate on farming and enjoying life. As long as you have debt there is potential for trouble when seasons go bad or prices do the same. It was Solomon who wrote “The borrower becomes the lender’s slave”. In my GBAC Advisory consultancy I have seen many farmers working day and night to make more profit for the bank than for themselves.

Coming up are four more hints on turning farm debt into farm profit and they are the most spectacular of all.

Ten ways to turn farm debt into profit – Hint 5

Many people put a lot of time and effort into applying for and securing loans. Then they receive an offer, hopefully a few; check the offer and loan documents thoroughly and sign up. After that they hold out the bucket for the money to drop into. Once that happen the vast majority forget about the loan, depending on permanent payment arrangements to attend to payments.

As long as it all goes well, it all goes well. If loan repayments are met on time all the time there is really no problem, but the borrower may well be flying blind. They may depend entirely on bank statements to reveal how the loan is going.

One thing the Royal Commission did show is that some of the most respected lenders sometimes cheat borrowers. If your aim is to make profits out of your loan or to gain an asset that will increase in value or contribute extra profits, it will be wise for you to maintain your own records of how the loan is reducing and compare that with bank statements. Carefully record the interest and charges that increase your debt and the repayments that reduce it. Then compare them to the bank statements when they arrive.

It is easy to set up a spread sheet with 5 columns – 1.date, 2.opening balance, 3.interest and charges, 4.repayments, 5.closing balance.

Each line down the page in the first column would be one month in the loan term column.
Columns  2+3-4=5.

One of the most important factors to understand is the balance outstanding at any one time.

If anything goes wrong with the loan or your relationship with the lender, it will be important for you to have a record of the life of the loan as well as the lender having it. The thug like debt collector who is charged with recovering a debt that is in default, is a very different person to the smiling lender who approved the loan application.

People in trouble with bank loans often come to my firm with a big debt problem but few records of what has transpired. Some do not even have a copy of their loan contract. When we sit down for serious negotiations with a lender, the lender will not readily produce documents that prove it did something wrong or even illegal. When the borrower has a good record it is much easier to pinpoint faults on the part of the lender.

This sort of record should take only about 15 minutes a month to maintain. If for any reason you decide to refinance elsewhere that record can easily demonstrate your ability to meet loan terms if you happen to not have bank statement to do so.

Your record may well provide you with a better indication of what the loan is actually costing you that can quickly be compared with your profits each month as compared to last year and budget.

A loan can be a good profit-spinner but it can also be a loss-maker so records are important. When I changed GBAC from a Chartered Accountancy practice to a debt solutions consultancy for businesses and farms, I saw how easy it was for borrowers to get into strife. Having run my own businesses and farms as well as consulting, I could understand the constant pressures under which business and farm owners operate. Businesses always face competition from other businesses along with government regulation whereas farmers have to contend with unpredictable weather & prices.

Keep good records and think often about your debt and how fast it is falling. If you need advice call a consultant.

Ten ways to turn farm debt into farm profit – Hint No 5 Monitor your debt

Once your loan has been received, monitor every change in the debt yourself. You need to know at least as early as the bank does, what is happening with your debt. Otherwise you can find yourself paying penalty interest rates instead of what you thought you were paying. It also means you know how much you would need to refinance if the relationship with your lender collapsed.

Prepare an excel spreadsheet to record repayments and residual debt levels.

Columns could be:

Transaction date; opening balance; add interest charged since last entry; less repayment made since last entry;  new closing balance ( becomes opening balance for next transaction date).

Transactions would be entered whenever repayments are made – weekly, fortnightly, monthly, quarterly, annually Etc

By doing that you will always know how much debt is left, what interest is being charged and whether payments are up to date. That is a lot better than you relying on the bank to record the details correctly and thus the bank being the only one to know how your loan is progressing.

If problems arise, contact the bank quickly and explain what caused them. It is very easy for a flood or fire to bring cashflow to a halt or even drain bank balances.

Ask for an extension of time. Even when you are given an extension, if you use it many banks will still treat that as a default that they can use against you later. It is not a problem but it is good for you to know.

If there are serious difficulties with repayments or friction with the bank, call in a consultant like GBAC to manage the situation for you. Consultants do that all the time and are therefore more familiar with what will be acceptable to the bank and what other options you have, like refinance with another bank.

Major problems with the bank can cost a heap of money and destroy the profitability of your loan. They can also take up masses of time again diverting borrowers from profit-making. By delivering you extra profits as well as a capital asset, your debt will be making all the effort worthwhile.

Any borrower not earning profits is probably making losses. Don’t let anyone tell you “they are just paper losses”. There is no such thing. That I know after  years of consulting and accounting.

Seriously helpful hints follow up to No 10.

Turning debt into farm profit Hint No 4 – Read the contract

Hint No 4 – read and understand every word in your loan document

I am sorry for the week long gap in posting. I have been on the farm working flat out. It is hard to believe that fenced creek crossings that survived for 30 years have been knocked out and reinstated 4 times in the past 12 months or less.

My last 4 hints ( Nos 7,8, 9 & 10) are the most interesting but hint number 4 is very important.

Read and understand every word in your loan document. Lenders count on the fact that borrowers do not know the law or speak legalese and so rarely read the loan document fully. Even when they take it to a lawyer the lawyer often just peruses the contract or Letter of Offer and as long as it does not depart from the usual, advises the borrower that it is okay to sign. Never, under any circumstances use the same lawyer as the lender. A lawyer cannot serve the lender and you. The lender’s rights will always take preference.

Many lenders take the opportunity provided by expanding or slightly changing a loan facility, to insert clauses into it which favour the lender and disadvantage the borrower.  They count on the borrower assuming that nothing has changed. You will know that “assume” makes an ass out of “u” and “me”

In one revised 15 year loan contract I looked at, the bank had inserted (less than a year after the loan was originally offered to the borrower) a new clause requiring the borrower to sell the farm over which the loan was secured within 12 months and pay the proceeds to the bank. No mention of this change had been made to the borrower who was required to sign it on the farm when presented to him without legal advice.

Before we send a client to their lawyer for legal advice, we work through the contract or LOO with the borrower explaining the monetary impact of those clauses that require understanding rather than legal knowledge. Where the borrower does not completely understand a clause we mark it with a pencil cross for the lawyer to explain it fully.  We suggest that if the borrower is not happy with a particular clause, he or she crosses it out, initials the alteration and presents it to the bank saying they would not accept that term. In most cases if their reasoning is fair the lender will accept it.

The benefit of the loan application system which gets 2 or 3 lenders willing to lend, is that if the preferred lender will not accept the borrower’s deletion, one of the other lenders can be asked if they would. In such circumstances it is good to let the original lender know that another lender is being approached. Competition for the ultra-profitable lending business can be very persuasive.

Always check with a loan consultant for a Loan Impact Assessment so that you know what to expect  during the loan term. Then have a good lawyer who is not acting for the bank and preferably never does, advise you on all the legal implications.

Do not believe the fairy story that the bank will not sell you up if you default. I have sat with bankers telling a couple with young children that the bank would never force them out of their home if they got into trouble and then seen that very bank do just that. It is not that the lending officer is a liar. He or she believes the bank will treat borrowers fairly. But the person who forecloses and throws the family onto the street is a different person with a different perspective on life. Don’t be fooled and find yourself with nowhere to go like this goanna on a hot tin roof.go

I warned farmers about this in an article I wrote about 30 years ago in The Hereford Quarterly, but people in the bush have been raised to trust their bank manager. It used to be a good idea, before the banks were deregulated by politicians and realised that they could make super profits by entrapping borrowers, charging penalty interest rates then selling them up after a decade or so of trying to service an impossible loan.  It was that de-regulation that prompted me to move my GBAC Chartered Accountancy practice from primarily business profitability and tax planning into a bank loan problem solving consultancy.

10 way to turn farm debt into farm profit. Hint 3. Only borrow for capital expenditure

When I was a young trainee Chartered Accountant of 19 we had no money in my family, widowed mother and twin younger sisters. On the way to an audit job I discussed with my senior the prospects of Mum or me borrowing some money from the bank . I’ve always remembered his words -“You should never borrow for consumables. Only borrow for capital expenditure on some asset that will last for long time like a fridge, car or furniture.” We may have been considering a washing machine, radiogram or to have the house painted. I painted the house myself anyway.

Whatever it was, I absorbed the message very well and I have never borrowed money for any reason other than to buy and asset. It is generally important not to borrow money to cover farm losses. Better to stop spending and stop the losses.

Decades later I hunted around for a property on which to run sheep and found one in the middle of NSW for which we were able to pay cash. We loved it. Wool prices were good and so we made reasonable profits there.

But I wanted to protect against drought so I built a couple of smaller dams and then decided on a 20,000 yard dam in a large paddock. I learned about “spreader banks” to catch the water and spread it over the paddocks. Great idea, so I borrowed from the bank and spent a good bit of money on it and the dams. In the end the spreader banks did not do what we hoped and sheep would have done as well out of a 5,000 yard dam there instead of the 20,000 yard .farm dam

When I subsequently purchased beef cattle property originally settled by my great-grandfather I became enthused about cell grazing and fenced one valley into cells. Because I spent half my life on the road driving around NSW consulting farmers who were in trouble with banks and getting a good hunk of their debts written off, the cell grazing could not really be properly managed. For all the years it operated I do not believe that we ran one extra cow in those paddocks. It was not the fault of the cell grazing system.

I chalked them up to experience. They were not good investments because I had failed to do my homework and see what would work for me in my circumstances.

Those two were about my only bad capital purchases. A visitor one day remarked that he liked the farm, adding “but the only problem is that the fences are all the same age – old.” I replied that I ran the farm to earn income, not to make it look good. As I grew older and we sold off blocks to keep the place to a size we could manage on our own, I confirmed that new fences would not have run more stock or increased the sale value.

But if you are fencing or building sheds or even buying the block next door, on a bank loan, do the sums. Work out what it will cost and how long before you get your loan paid off out of the extra profit you earn. If you are not good at figures, sit opposite your accountant for half an hour and you should have the answer. If not call me at GBAC and I might be able to tell you over the phone for free.