Farm overdrafts and seasonal finance explained

It's January. The weaners won't sell until March, the fuel and wages keep going out, and the account is sliding further below zero every week. That gap between paying and getting paid is what an overdraft or seasonal facility is for. The hard part is working out how big the limit needs to be.

I started as a personal and business banker at Greater Bank, and I've worked in commercial and equipment finance since 2018. This guide explains how these facilities generally work. Your own facility letter sets the real terms, so read it and compare offers.

What working capital is

Working capital is the cash a business needs to keep running between paying its costs and being paid for what it sells. On a farm, most costs come in steadily or early in the season. Most income comes in a few big cheques.

ABARES says working capital is one of the two main reasons broadacre and dairy farms borrow. The other is buying land.

Why livestock businesses need it

A cattle or sheep business can go months without a sale. A breeding herd might sell weaners once or twice a year. A wool cheque might come once a year. In between, you still pay for fuel, wages, animal health, feed, rates and interest.

A dry spell makes it worse. Feed bills go up at the same time as sales are delayed or prices fall. The RBA noted in 2013 that farmers increased borrowing in drought to meet their working capital needs.

How an overdraft works

An overdraft lets your farm account go below zero, up to an agreed limit. Money comes in and out of the same account, so the balance swings up and down through the year.

• Limit. The most you can be overdrawn. Going past it can mean dishonoured payments and extra fees.
• Interest. Charged on the amount you use, not the whole limit. Westpac's business overdraft page says interest is charged only when your spending goes past the account balance.
• Line fee. Many lenders charge a fee for having the limit available. Westpac, for example, says its line fee is charged monthly on the total limit.
• No set repayments. You don't make fixed payments. Income going into the account pays it down.

How a seasonal facility works

A seasonal facility is built around the farm year. You draw it down for a season's costs. You pay it back from that season's harvest or stock sales.

Canstar describes seasonal finance as repaid in the months when you earn a return on your harvest, with fewer, larger repayments. Its 2016 article says interest may be debited monthly from the farm account. Each lender sets its own rules, so ask when the facility must be cleared and whether you can redraw.

Overdraft or seasonal facility: the difference

Annual reviews

Most farm overdrafts and seasonal facilities don't run forever. Your facility letter will say when the lender reviews the limit or when it expires. At the review, the lender will usually ask for financial statements, a budget and a monthly cashflow.

The Banking Code of Practice says that if a bank extends or refinances a loan, it doesn't have to do so on the same terms. So a review is a chance for the lender to change the limit, the fees or the conditions. Read what the bank looks at in a farm review and how to read your bank's review letter.

What hardcore debt means

An overdraft is meant to swing. It should go down when costs go out and come back up when income comes in. Hardcore debt is the part that never comes back. If your account's best point all year is $40,000 overdrawn, that $40,000 is hardcore.

Hardcore debt is really long-term debt sitting in a short-term facility. It usually means the farm spent more than it earned, or bought something lasting with the overdraft. The GRDC fact sheet says debt should match the life of what it paid for. A tractor or a water project bought on overdraft breaks that rule.

How lenders view it

Lenders want an overdraft to be used for working capital. A 2018 Farming Ahead article warns that if short-term borrowing isn't repaid after harvest, the option may not be there next year. It says the repayment plan should then be reviewed.

One way to fix it is to move the hardcore part to a term loan with set repayments. That frees the overdraft to do its real job again. Whether that's possible is the lender's call, so raise it early and bring a plan to lift income or cut costs.

How to size a limit using a monthly cashflow

You size an overdraft from the cashflow, not from a guess. Here are the steps.

1. List every expected receipt by month: stock sales, wool, grain, other income.
2. List every payment by month: wages, fuel, feed, animal health, rates, insurance, loan repayments, drawings and tax.
3. Start with today's bank balance and work out the closing balance for each month.
4. Find the lowest closing balance of the year. That's your peak need.
5. Add a margin for a late sale or a cost blowout.
6. Check the balance comes back up after sales. If it never does, you have a structure problem, not a limit problem.

The cashflow forecaster does steps 1 to 4 for you.

A worked example

This is an invented breeding cattle business near Forbes, and the figures are illustrative. It sells weaners in March and April and some cull cows in May. It starts July $20,000 overdrawn.

Receipts and payments both add up to $405,000, so the year ends where it started, at $20,000 overdrawn. The lowest point is $242,000 overdrawn, in January and February.

The account comes into credit in April and May. That means the overdraft swings fully, and there is no hardcore debt in a normal year.

Adding a margin

A sale can be a month late, or a big bill can land early. Here I'd add about one month's payments, say $30,000, to the peak. That takes the need to $272,000, so the business might ask for a limit around $275,000. That's the size of facility the cashflow supports. Whether a lender agrees is its own decision.

What a poor year does

Now say weaner prices are 15% lower. March receipts fall from $180,000 to $153,000. April falls from $150,000 to $127,500. That's $49,500 less income.

The peak in February doesn't change, because it comes before the sales. But the account now closes March at $131,000 overdrawn and April at $35,500 overdrawn. Its best point is May, at $25,500 overdrawn. It ends June at $69,500 overdrawn.

So in a poor year the account never gets back to zero. That $25,500 has become hardcore debt, and next year starts $49,500 deeper. The season stress test runs this kind of check on your own numbers.

Talking to the lender

Take the cashflow to the lender before you need the money, not after. The ABA's agribusiness page says your bank may ask for a business plan, a statement of position, a cashflow, a list of debtors and creditors and tax information. If you can show the peak, the margin and the poor-year case, the conversation is much easier.

If the limit is getting tight mid-year, ring early. The ABA page says banks may offer extra temporary finance, such as an overdraft, to cover short-term cash shortages in hard times.

For the bigger picture of farm finance, see what loans are available to farmers. If you're funding stock purchases, read livestock finance and restocking after a dry year.

Where to get help

• Rural Financial Counselling Service: free, independent help with cashflow budgets and talking to lenders, on 1300 771 741.
• Regional Investment Corporation: the RIC Drought Loan can be used for operating costs in drought, if you're eligible. See RIC loans explained.
• State farm lenders: see state government farm loans.
• NSW DPIRD Farm Business Resilience Program: workshops and coaching on business planning. Check the NSW Government page for what's running.
• The ATO and your accountant: for tax timing in the cashflow.
• A solicitor: for anything in a facility letter or guarantee you don't understand.

If you'd like the cashflow built and checked before the review, the Bank Review Pack is $1,850 plus GST. It includes a monthly cashflow and a poor season case. For a first look at your ratios, try the bank ratio check or book a Farm Health Check for $850 plus GST.