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.

 

10 ways to turn farm debt into farm profit Hint No 2 -don’t borrow for running costs

Don’t borrow for day-to-day running costs

For farm debt to produce a profit it is generally better to fund operational expenditure out of cash in the bank. It is not good to borrow to cover farm operational expenses except in the rarest of circumstances.

If it becomes necessary to borrow to cover such expense as fuel for grain producers or feed for stock, there is a big risk that a crop failure or a stock price fall may result in residual debt. That then has to be cleared from a future season. All it takes  to turn anticipated profits into losses is a bad season, a fall in prices or some other calamity. Frequently efeeding outven the cost of substantial refencing is not recovered and in many cases it is better to just repair the old fences.

I have spent plenty of money on running costs that I thought would be profitable only to find when I monitored results that the anticipated profit did not eventuate. The consequences of a mistake can be much greater when debt is involved. Sometimes we borrow to make operations easier and faster or become more productive. Then we have more time to spare and end up spending more money on whatever we do to fill in that time.

For most of my farming career I have felt that the less I borrowed the more money I made. We farmers always want to be busy and being busy often involves spending money. Frankly there is considerable merit, once the farm is working well and producing recurring profits, in spending a bit more time sitting on the verandah and enjoying the view. It is seeking to make a farm more profitable that often directs much of the profit to the moneylender.

Next hint will be about borrowing for capital expenditure.

10 ways to turn farm debt into farm profit Hint No1

Note: everyone’s circumstances are different. These are just general hints. To check what is good for you please consult your accountant or a GBAC consultant

Get the right loan for you at the time!

Borrowers have a tendency to stick with the bank they know. Up to 1987 that was a good idea. The bank manager knew each customer and was as much a financial adviser as anything. The manager would rarely lend any customer into trouble, was not paid very much, but was greatly respected in the community. Banks were regulated in their behaviour by government so that they served Australia and Australians. De-regulation by politicians in the Hawke/Keating era changed all that.

Profit gradually dominated bank behaviour from then on and has led to a stratospheric rise in bank profits with bank CEOs being paid up to $1 million a month. It has also been catastrophic for many bank customers.  Every dollar of CEO pay and bank profit is a dollar lost by a bank customer. The Royal Commission discovered the extent to which banks have deliberately lied, cheated, abused and defrauded their loyal customers.

Hint number 1 for turning debt into profit is to get the right loan in the first place. To do that a borrower can invite every possible bank to offer their best loan. In 1987 I invented the Moneygram system for making that easy and we have refined it since. Most farmers look for quality stock, hay or seed before price, but do not apply the same rigour to loans. It is only later on that many discover flaws in their loan deal. It is each term in the loan contract, not just the rate of interest, that is important. Many lawyers do not know what to look for in that respect. It takes a knowledge of accounting and farming to to that.

Big Banks

One GBAC client was given a 15 year loan to refinance a debt secured by a mortgage over two of his farm properties. When the government caused a crisis 6 months later and livestock could not be sold to cover planned loan repayments and farm expenses, the bank “kindly” gave him a 10% increase in the loan, but insisted on a new contract for the whole amount combining the old and new loan. Without drawing it to the borrower’s attention, the bank slipped into the middle of the contract a clause requiring one of the properties to be sold within 12 months.

Even if they had seen that clause the customer could not have refused the revised contract without defaulting given the prevailing circumstances. The loan money had been spent. Nobody would have refinanced at that time in that climate of financial fear on farms. The bank would take the proceeds to clear the mortgage on that block.

What a surprise for the farmer to discover that he had inadvertently agreed to sell his largest property, which would make the remaining debt very difficult to service!!

We have seen different banks all around Australia treat customers like that as profit became far more important than the lives of the borrowers and their families. Make sure the contract you sign gives you the best possible loan.

The next hint, No 2 will be about what should and should not be financed by debt.

Have you got a beef with your bank?

Farmers all over Australia carry substantial debt along with their livestock and crops. Often it comes from buying the farm from the family. We tend to find that inter-generational transfer of farming done without bank involvement works best. Banks make huge profits by lending farmers money at substantial interest rates and large charges to buy farms. That money is then paid back into  the banking system by the seller at a far lower interest rate and without the extra charges that go with a loan. That yields bigger profits than your best season’s crop.

Decades ago when moving from sheep to cattle and buying my own place for a lot more money than I had, I arranged a 20 year interest-free loan to purchase a family farm from a relative. The trade-off was that he could continue to live in the main homestead, while we would live in a workman’s cottage, for as long as he liked. He enjoyed that for 7 years and we enjoyed his company experience and advice. Then he moved out and we had a superb homestead and the farm to ourselves. In 20 years we had paid it off. My Chartered Accountant brain was happy. We built into the loan agreement provision to cope with droughts, floods and other disasters. Every 5 years we had to ensure that a quarter of the debt had been repaid. In between we could defer the odd payment if an unusual event arose. It was a strain to pay it off but it worked well. The thing about family loans in passing down a property is that firstly the older generation does not need a bucket of money all in one go and secondly it cares deeply about the younger generation and will understand any unexpected loan repayment issues far better than any bank.

Many farmers who have used bank finance to buy their farm or add another block, even buy stock, report problems with the bank in hard times. Around Australia we have just suffered devastating bushfires, drought and floods. In 2011 the live trade suspension spelled disaster for many cattle breeders from which they struggled to recover for years. Predatory banks saw an opportunity to load up already indebted farmers with more debt then charged extortionate penalty rates of interest as payments could not be met. Penalty interest made it even more difficult to meet repayments so debt grew and grew so that eventually the bank could sell the farmers up and gift their friendly receivership firms a few hundred thousand dollars in fees paid by the farmers in the process.

Standard practice for many farmers in such a position is to desperately flog the farm in order to meet loan payments and try to ignore threatening letters from the bank. This causes massive stress on them and their families and makes the bank as angry as poking sticks at unfriendly bulls does. Far better is to deal with the underlying problem which is excessive debt aggravated by abnormal circumstances. It was a Rural Counsellor in Dubbo NSW who set me on the right path. One day after referring another of her clients to me she remarked “If he’s got noxious weeds don’t let him treat them. They devalue the property and discourage the bank from foreclosing. Most farmers who have a beef with their bank inflate the value of their property. That just encourages the bank to sell them up. Leave it as run down as possible then negotiate a partial debt write-off and refinance them elsewhere.” That clever lady taught me a lesson that has benefited farmers in every state and territory of Australia whether in farm debt mediation or not. What I then learned from that was that money lenders write off debts just like fruiters throw out the fruit that goes bad and bakers sell off cheap yesterdays stale bread.

So when you have a beef with your bank don’t back off any more than this black bull would do. But be prepared to crack the whip and let the bank know that you, the customer, are in control.  This guy was very friendly from birth, but I never moved him on foot without a whip in my hand. That is a good way to handle your bank too. There are ways to make that easier which I will discuss some other time. Black Bull

Over the decades I also discovered that when I reported dishonest banks for malpractice to every one of the 225 Members of Federal Parliament, that led a storm in the boardroom, action by authorities or a Royal Commission. None worked well for uncaring bankers sticking pins into troubled farmers. There are plenty of good bankers out there and in my next blog I will talk about getting to them.

Greg Bloomfield
www.gbac.com.au

Debt can be complex

The Financial Review, The Land and capital city dailies like Sydney Morning Herald have carried extensive analysis of the Federal Budget. Our loan consultancy GBAC Advisory has been looking through the pages and commented on the complexity of borrowing. We worry that banks so ready to lend money for businesses, homes and farms may turn nasty and look to foreclosure if the borrowers can’t meet repayments. Never let a bank foreclose on your hard earned assets.stop foreclosure

Interest rates are almost non-existent which is prompting a lot of borrowing. It is easy to forget the days not so long ago when a farmer called us about his $1m loan on which he was paying 24%. We did great things and got him the loan at 18% earning him a $300,000 profit over the term of the loan.

Government ( taxpayers) is supporting a lot lending. It will be interesting to see what happens when numbers of those borrowers run into strife. We tend to think that the government may come down on the side of the borrowers if the government is guaranteeing the debt. One reason we have been able to help farmers and business owners convert debt into profit through debt discounting is that we have  a unique method of involving Parliament in supporting borrowers who have been treated badly, in fact in supporting anybody who has been treated badly. That particularly relates to borrowers heading to mediation, farm debt mediation or receivership.

Don’t hesitate to call some consultant for assistance if your debt causes you problems. There are few problems that cannot be solved.

 

Don’t let Doom Loop 2 get you!

Never heard of a  Doom Loop? Not surprising! But it can catch you too.

“Doom loop” is when banks get dragged into serious financial trouble by non-performing loans to governments that have grossly overspent. In the GFC it was solved by other countries bailing out those like Greece.

There is a similar doom loop created when Australian businesses & farms have the loop gently lowered around their necks by clever bank marketing of unaffordable loans. The borrowers, years later, get dragged into receivership or bankruptcy by those banks.

We converted GBAC  from a Chartered Accountancy firm to a bank loan consultancy when we saw the disaster unleashed when our politicians de-regulated banks. Bank profits and CEO pays have skyrocketed and Australians mostly pay a bit more for everything because they borrow for it or prices are increased to cover charges of “non-interest” lenders. Borrowers can lose everything they have spent decades working for

It is no fun for business and farm owners to suffer for years when caught in the Doom Loop. They usually work their hearts out to keep abreast at least of interest at penalty rates but then in the end are often sold up.

That is quite unacceptable. Moneylenders are the experts at assessing the ability of borrowers to repay loans. Borrowers usually only take mortgage loans once or twice in their lifetimes so they are nothing like as familiar with loan failure as the bankers. What really gets us is the way in which reputable banks lend into situations where it is glaringly obvious that the borrower is going to fall over sometime. The bank will have earned penalty interest for perhaps decades and then sells the borrower up because it has not all been paid, when the loan might even be double its original size due to that unpaid interest and charges. Current relaxation of Australian laws facilitates the creation of a Doom Loop.

The remedies are:-

  1. Use an “own broker” service like loanagram to convert bank charges into profits. It is not like a broker who is paid thousands of dollars commission by the banks. It costs only $250 and allows you to offer your loan business to a number of banks who will then compete for that business. Competition amongst banks gets you the most suitable loan at the best rates. It can also allow you to save thousands of dollars in set-up fees which would otherwise be used to pay the broker who introduced you.
  2. Have a professional loan application prepared to show banks that you are going to be just the sort of customer they want who will service and repay the loan in accordance with the contract. That makes negotiations more profitable.
  3. At the same time obtain a Loan Suitability Assessment to ensure that the loan is tailored to your business or farm needs. That is the key to having a loan that is easy to service and repay even when times get tough.
  4. For long term loans it pays to have a professional review every 5 years or so to ensure that the bank is doing the right thing by you. Far too often the loan is set up so that after a few years the bank can make changes without the borrower being aware of it.

If you want to check out anything to do with loans please feel free to give us a call at GBAC Advisory on 0428 417 496

Turning debt into profit

Default
It is a difficult concept to grasp but a great deal of bank debt on loans that are in or nearing default is really accumulated interest that has reduced business or farm profit whilst being accumulated onto unpayable loans. That itself reduces future profit to service debt and so the cycle collapses on itself.

Dishonesty
When GBAC researches the background of debts that are in trouble we frequently find that the borrower has been seriously misled, sometimes defrauded by the bank. The recent Banking Royal Commission revealed the staggering level of dishonesty in the banking and finance industry. GBAC has been aware of it and dealing with it since 1987 when banks were deregulated and allowed to do pretty much anything they liked to customers as long as it made big profits for the banks and big pay packets for the CEOs. Politicians issued them with licenses to print money and rob customers.

Debt turned into profit
But we are able to turn the tables in many instancesTurn your debt around and have the banks write off some of their ill-gotten gains. We have over the past 30+ years seen vast amounts of debt turned into profit.  A few examples are $5 million from a $30m loan facility, $1m offered from a $7m debt; $700,000 from a $1.4m farm loan and $650,000,the whole of one retail business debt, completely turned into profit.

Borrower wins
When banks act dishonestly under the direction of dishonest directors who know they will not go to gaol because they are protected by politicians, those banks deserve to write off dishonestly acquired debts. When we agree with a bank to have that done, it in fact delivers fresh profit back into the hands of the borrower.

GBAC
There are plenty of people out there who claim to help bank customers who have large unaffordable debts, but few of them have the persuasive powers that GBAC does.  We are qualified Accountants, we have run our own businesses and farms and we have a passion for fair treatment of Australians by those they trust and deal with. We also have a secret weapon against predatory bankers. All of the solutions we obtain are the result of the bank agreeing with us about the mistreatment of their customers and the amount of debt to be written off. We do not ever reveal the names of the banks who have been kind enough to deliver this unexpected profit into the hands of our clients.

Friends
If you have business or farming friends in trouble with banks, suggest they make contact via our websites www.gbac.com.au/business or www.gbac.com.au/farm . It costs nothing to have a chat about whether some of those debts might be converted into profits.

 

Dealing with post-covid debt

dealing with debt pressureParliament passes laws to favour the moneylenders, some of whom make big donations to political parties. More importantly they tell politicians what they want done. When you are dealing with debt sometimes you need fairer laws and sometimes you need to report unfair behaviour. If borrowers want to be treated fairly, they can use the power they have to influence the politicians who make the rules, to deal with what the borrowers know from experience about unfair lending.  There is a very effective way to do that, but first read what a wise Athenian said about knowledge:

“Having knowledge but lacking the power to express it clearly is no better than never having any ideas at all “- Pericles (Athenian statesman)

Together FairGO, Votergrams and Voters Network give every Australian all the power and influence they need to start shaping Australian Society and bank loans in particular.

You can speak up too, in the right way, to the right people, at the right time. We have helped Aussies do that for the past 35 years, avoiding media or public attention to focus on quietly persuading the decision-makers in parliament.

That is in addition to GBAC helping borrowers obtain fair treatment from banks.