Farming can be a hard life. There’s the long hours, hard physical work in tough conditions, plus all the worries that come from exposure to bad weather, livestock diseases, and fluctuating feed costs. The vast majority of the 142,000 business registered as operating in farming in the UK are small, with nine out of ten farmers being sole traders or partnerships, according to the National Farmers’ Union (NFU). Like any SME, agricultural businesses need funding to survive and expand. And, in recent years, more are beginning to turn to alternative finance providers to realise their growth ambitions.
The challenges facing farmers
In its recent pre-election manifesto, the NFU’s top priority was to call for investment in growth in the farming sector. This sat alongside other concerns, including a desire to reduce regulation – three out of four farmers say legislation has damaged their enterprise, and the National Audit Office estimates that cost of regulation equates to about a tenth of a farm’s net profit on average. Providing faster rural broadband speeds is also a pressing need, and allowing farmers to tap into Government-funded research would also be welcomed. But money for growth remains the major issue for many agricultural businesses.
Official research from the Department for Business, Innovation & Skills shows that, like most SMEs, companies operating in agriculture, hunting, forestry and fishing have been less likely to seek credit in the form of overdrafts or bank loans since the economic downturn of 2008. It comes as no surprise, therefore, that Boost Capital has seen a sizeable increase in the number of farming businesses coming to us for short-term business loans. The farming sector is among the top ten industries that successfully applied for and received funding from us in 2014, as our recent business growth infographic shows. And our research also found that farmers are pretty optimistic about the future, so they’re likely to seek out even more investment capital in the months ahead.
Early adopters of alternative funding
In many respects, farmers have been using alternative finance for years. With major investments in large scale machinery and farm vehicles being a necessary part of their work, both invoice and asset finance have long been popular methods of spreading the cost of buying expensive fixed assets, using hire purchase or lease finance agreements. But such arrangements often use the asset itself as security for the money borrowed. More farmers are turning to short-term, unsecured business loans in recent years, being attracted by the simplicity of this type of funding, the fact there’s no need for security against borrowing, plus the attraction of an application and approval process that’s typically straightforward and very fast.
Diversifying to survive
Many farms have realised that one way to improve their cashflow and support their core business is to diversify into other areas, such as providing campsites or other accommodation for tourists, producing and selling cheese, or opening a farm shop. About 56 per cent of all farm businesses in England have some diversified activity, the NFU says, and these extra activities added about £440 million to farming’s bottom line in 2012 to 2013.
Again, such extra income streams take investment to set up in the first place. The Rural Development Funds for England, Scotland, Wales, and Northern Ireland offer potential support for new projects, but growing numbers of farmers prefer help from alternative funders to get their ideas off the ground. Newton Farm Foods near Bath in Avon used a peer-to-peer platform to raise money to extend its farm shop and cafe, while Zero Carbon Food, which grows salads and herbs in an abandoned World War II bomb shelter underneath Clapham in South London, decided on equity crowdfunding to get the capital to expand their range. Boost Capital’s farming customers are also using short-term borrowing for a myriad of reasons – to cope when cashflow is sluggish, to buy stock or feed, to refurbish premises, or to buy new equipment. In many respects, farmers have never had so much choice about where to look for funding.
Meeting the 2015 investment deadline
Another reason agricultural bosses may need a financial boost this year is that they only have until the end of 2015 to claim 100 per cent tax relief on machinery and plant expenditure up to £500,000 under the currently inflated Annual Investment Allowance. The Chancellor George Osborne announced in his most recent Budget that the rate will drop back after December 31, but not to its usual level of £25,000. Osborne seems most likely to reveal the revised rate in his autumn statement, but, nevertheless, farmers needing to make big investments in new machinery would be well-advised to take advantage of the generous tax break at its best. And businesses lacking the ready cash for such a large amount of expenditure may choose to look to asset finance, or short-term business loans to bridge the gap in funding, and get the tax advantage while they can.
Farming may remain a traditional industry in many respects, being reliant on land and livestock to make a living. But new techniques and technology are improving processes and efficiency on farms – and in the way they’re financed. Alternative finance is one such revolution for small farming businesses and other SMEs alike. It’s one way in which innovation is improving things for hard-working, ambitious farmers up and down the country.