# How the bank looks at your farm A free short course from Farm CFO by Clunes Rural. 5 lessons, about 25 minutes in all. No sign-up. See your farm the way a credit team does: the annual review, the main ratios, covenants, what goes in a review pack and when to call. Who it's for: Pig, cattle and sheep farmers with a bank loan or overdraft who want the annual review to be shorter and less stressful. You'll be able to: - Know what the annual review is for and plan for the due date - Work out interest cover, debt service cover, LVR and equity from your own figures - Find your covenants and check where you stand against them - Put together a review pack and know when to talk to the bank ## Lesson 1: What the annual review is for Most farm facilities are reviewed once a year. A facility is any loan or limit the bank gives you, such as an overdraft, a seasonal facility or a term loan. At the review, the bank asks for up-to-date figures so its credit team can decide whether to carry on, change or renew your facilities. A review letter on its own is not bad news. It's the bank doing what your facility letter said it would do. ## What the bank is asking When a credit officer opens your file, they're asking a few plain questions: - **Can the business carry its debt?** That's about what you own and what you owe. - **Can it repay the debt, even in a poor year?** That's about profit and cashflow. - **Does the person running it know their numbers?** That's about you. They also weigh up your industry, using the bank's own history with pigs, cattle or sheep. You can't change that part, but you can change how the others look. ## Reading the review letter The letter usually has four parts: 1. **The facilities being reviewed,** with limits and expiry dates. Check them against your own records. 2. **The documents wanted,** such as last year's financial statements, a budget and cashflow, and a statement of assets and liabilities. 3. **The due date.** Circle it. If it falls in a busy month, plan around it now. 4. **Anything new.** Look for words like "conditions", "covenant", "valuation" or "reduce". If you see one, ring the bank manager and ask why. Our guide to [reading the review letter](https://farmcfo.com.au/guides/bank-review-letter) goes through it line by line. ## Why the due date matters Most loan agreements require you to send financial information. The Banking Code of Practice is a set of promises made by the banks that sign up to it. For small business customers, it lists not providing financial information your agreement requires as one of the defaults, other than missed payments, that a bank can act on. It also says the bank must give at least 30 days' notice of such a default. None of that should come into play if you keep the bank informed. If your accountant is behind, ring the bank before the date, explain, and confirm the new date by email. Under the 2025 Code, a small business is one with turnover under $10 million in the previous financial year, fewer than 100 full-time equivalent staff and less than $5 million in total debt to all credit providers. Many larger farms won't meet that test. Your bank must have signed up to the Code for it to apply, and a solicitor can tell you what your own agreement says. ### Worked example **An invented farm, for learning only.** A sheep business gets its review letter on 10 August. The bank wants documents by 30 September, which gives 51 days. The accountant says last year's statements will be ready on 15 September. The owner works backwards: | Task | Target date | |---|---| | Ask the accountant for the statements | 12 August | | Gather stock numbers, insurance and rates notices | 22 August | | Build the budget and monthly cashflow | 5 September | | Check the ratios once the statements arrive | 17 September | | Write a short covering note | 22 September | | Send the pack | 26 September | That leaves four days spare in case something comes back late. Use the bank review checklist: https://farmcfo.com.au/templates/bank-review-checklist ### Check your understanding 1. What is the annual review mainly for? Answer: For the bank to decide, from up-to-date figures, whether to carry on, change or renew your facilities. The review is a routine check the facility letter allows for. The bank uses your latest figures to decide what happens to each facility. 2. Your accountant won't have the statements ready by the due date. What's the best step? Answer: Ring the bank before the date, explain why, and confirm a new date in writing. Telling the bank early keeps it informed and on your side. Silence past a due date is what turns a late pack into a problem. 3. Which part of the review letter needs the most careful reading? Answer: Any new wording about conditions, covenants, valuations or reducing a limit. Those words are where a review stops being routine. If you see them, ask the bank manager what's behind them. ## Lesson 2: The four ratios the bank works out The credit team turns your accounts into a handful of ratios. A ratio just compares one number with another. Here are four of the main ones. Each bank works them out a little differently and sets its own limits, so check your facility letter for the exact wording. ## Interest cover How many times profit covers the interest bill. It's usually EBIT divided by interest. EBIT is earnings before interest and tax: profit before tax with the interest added back. If EBIT is $300,000 and interest is $100,000, interest cover is 3 times. The higher it is, the further profit can fall before the farm can't pay its interest. ## Debt service cover Interest isn't the only thing you pay. Loan principal, the part that pays the loan off, comes out too. Debt service cover compares the cash the business earns with interest and principal together. One common way is EBITDA less drawings, divided by interest plus principal. EBITDA is EBIT with depreciation added back, and drawings are the family's living costs. Below 1 time means the year's cash didn't cover the repayments. That's why it's the stricter test. ## LVR The loan to value ratio is how much you owe against what the security is worth, as a percentage. Security is what the bank can call on if the loan isn't repaid, usually land under a mortgage. If you owe $2 million against land valued at $5 million, the LVR is 40%. The bank uses its own valuation, not the price you'd hope to get. If land values fall, your LVR goes up even if you haven't borrowed another dollar. ## Equity ratio Equity is what you own less what you owe. The equity ratio is equity divided by total assets, as a percentage. ABARES, the Australian Government's farm research bureau, uses an equity ratio under 70% as one marker of a farm with less room to borrow more. That's a research measure, not a bank rule. Each lender sets its own levels. ## Read them together No single ratio tells the whole story. A farm with a high LVR but strong, steady cash can still be a good borrower. A farm with little debt that loses money in average years can still worry a bank. The bank looks at three or four years of results, and at what happens in a poor season. Before the review, work out your own ratios so nothing surprises you. The [bank ratio check](https://farmcfo.com.au/tools/bank-ratio-check) does the sums, and the [bank ratios card](https://farmcfo.com.au/templates/bank-ratios) has the formulas on one page. ### Worked example **An invented farm, for learning only.** A piggery's year looks like this: EBITDA $600,000, depreciation $100,000, so EBIT $500,000. Interest is $160,000, principal repayments $140,000 and drawings $110,000. - **Interest cover:** $500,000 divided by $160,000 is **3.1 times**. - **Debt service cover:** $600,000 less $110,000 is $490,000. Divided by $300,000 of interest and principal, that's **1.63 times**. - **LVR:** $2,400,000 of term debt against land valued at $6,000,000 is **40%**. - **Equity ratio:** total assets are $7,500,000 and total liabilities $2,600,000, so equity is $4,900,000. Divided by total assets, that's **65.3%**. Whether those numbers suit a lender is the lender's call. Try the bank ratio check: https://farmcfo.com.au/tools/bank-ratio-check ### Check your understanding 1. Why is debt service cover a stricter test than interest cover? Answer: It counts principal repayments as well as interest. Interest cover only looks at interest. Debt service cover asks whether the year's cash also covers paying the loan down. 2. A farm owes $1.5 million against land the bank values at $5 million. What's the LVR? Answer: 30%. LVR is the loan divided by the value, as a percentage: $1.5 million divided by $5 million is 30%. 3. Land values in the district fall 10%, and the farm hasn't borrowed any more. What happens to its LVR? Answer: It goes up. The debt is the same but the value it's measured against is lower, so the percentage rises. ## Lesson 3: Covenants: the promises in your loan A covenant is a promise you make in your loan agreement. When the bank lent you money, it set some conditions. They're usually in the facility letter, under a heading like "financial undertakings" or "conditions". Many farmers sign and never look again, until a poor year. The terms vary a lot between banks and between loans. Your own documents are what count, and a solicitor is the person to read them with you. ## Three kinds **Financial covenants** set a level your figures must stay above or below. Common ones are a minimum interest cover, a maximum LVR, a minimum debt service cover or a minimum equity ratio. They're usually tested once a year, from your financial statements. **Reporting covenants** are promises to send information. Examples are annual statements within a set time after 30 June, a yearly budget, stock numbers or insurance certificates. These are the ones most often broken, usually because the accounts are late. **Review events** let the bank review the facility if something happens. Examples are a fall in the value of the security or a change in who owns the business. They usually lead to questions and new terms rather than straight to enforcement. ## Find yours Get out your facility letter and list every covenant on one page: what it is, the level, and how often it's tested. Then work out where you sit today, and where you'd sit in a poor year. The gap between the two is your room. ## What a breach can lead to Breaking a covenant is called a breach. What follows depends on your agreement and your bank. It might be a letter and a waiver, a higher interest margin, new conditions such as monthly reporting or, in a serious case, a demand for repayment. For small business customers, the Banking Code of Practice limits which defaults, other than missed payments, a bank can act on. It generally requires at least 30 days' notice. It also says the bank will only act on such a default if it's material, or likely to have a material effect. A solicitor can tell you how that applies to your loan. ## Tell the bank first If your forecast shows a covenant will be missed, tell the bank before the statements arrive. Bring the numbers, the reason and your plan, such as selling stock earlier or putting off a machinery purchase. A breach the bank hears about from you, with a plan, is a far easier conversation than one it finds on its own. Our guide to [farm loan covenants](https://farmcfo.com.au/guides/farm-loan-covenants) goes into more detail. ### Worked example **An invented farm, with invented covenants, for learning only.** A cattle business must keep interest cover at 2.0 times or more and LVR at 50% or less. In an average year, EBIT is $300,000 and interest is $120,000. Interest cover is **2.5 times**, inside the covenant. To stay at 2.0 times it needs EBIT of at least $240,000, so its room is $60,000. In a poor year, EBIT falls to $220,000. Interest cover drops to about **1.8 times**, below the covenant. Its debt is $2,000,000 against land valued at $5,000,000, an LVR of **40%**. If a new valuation came in 20% lower, at $4,000,000, the LVR would be **50%**, right on the limit. Try the season stress test: https://farmcfo.com.au/tools/season-stress-test ### Check your understanding 1. Which of these is a reporting covenant? Answer: Sending annual financial statements within a set time after 30 June. Reporting covenants are about sending information. The other two are financial covenants, which set levels your figures must meet. 2. Your forecast shows interest cover will fall below the covenant. When should you tell the bank? Answer: Before the statements arrive, with the reason and your plan. Raising it early, with a plan, gives the bank something to work with. A breach it finds on its own is a harder conversation. 3. A farm has EBIT of $270,000, interest of $150,000 and an invented covenant of at least 2.0 times. Is it inside the covenant? Answer: No, it's at 1.8 times. Interest cover is $270,000 divided by $150,000, which is 1.8 times. That's under the 2.0 minimum. ## Lesson 4: What goes in a bank review pack A review pack is the set of documents you send the bank for the annual review. Send a complete, clear pack and the credit officer has fewer questions. The meeting can then be about your plans rather than your paperwork. ## The core documents | Item | Why the bank wants it | |---|---| | Three or four years of financial statements | Shows the trend over several seasons | | Management accounts since 30 June | Shows how this year is going | | Assets and liabilities at current values | Works out equity and LVR | | A budget, with a gross margin for each enterprise | Shows which parts of the farm earn their keep | | A monthly cashflow to the end of next season | Shows the overdraft stays inside its limit | | A debt schedule | Lists each loan, its rate and its repayments | | A poor-season test | Shows you've planned for a bad year | | A short covering note | Says what's changed and what you're asking for | A gross margin is one enterprise's income less the costs that go up and down with it, before overheads. The letter may also ask for tax returns, stock numbers, insurance certificates and rates notices. Our [bank review checklist](https://farmcfo.com.au/templates/bank-review-checklist) lists them so you can tick them off. ## The covering note This is the part most farmers skip, and the one we'd never leave out. A credit officer reads a lot of files. One or two pages in plain words saves them time. Cover: - how the year went against budget, and why - anything big that changed, such as a land purchase, a dry spell or a new enterprise - what the coming year looks like, including the lowest month in the cashflow - where you sit against each covenant - exactly what you're asking for, if anything Be honest about the bad parts. The bank will find them anyway, and it's better that it hears your explanation first. ## Make the numbers match Check the pack hangs together. The opening balance in the cashflow should match your bank statement. The loans in the debt schedule should match the balance sheet. The ratios in your note should match the figures you've attached. Small mismatches make a credit officer dig deeper. ## Start early We'd start about six weeks before the due date. The cashflow takes longest, and you may be waiting on your accountant. If you're asking for new money, start earlier still, because a new application usually takes longer than a routine review. Our [debt schedule template](https://farmcfo.com.au/downloads/farm-cfo-debt-schedule.xlsx) and [cashflow budget template](https://farmcfo.com.au/downloads/farm-cfo-cashflow-budget.xlsx) cover two of the biggest pieces. Our list of [questions to ask at your bank review](https://farmcfo.com.au/templates/bank-review-questions) helps you get ready for the meeting itself. ### Worked example **An invented farm, for learning only.** Part of a covering note for a sheep business: "Income was $820,000 against a budget of $900,000. That's $80,000 lower, mainly because lamb prices fell in autumn. Costs were $610,000 against a budget of $640,000, which is $30,000 lower, because we held off on fertiliser. So profit before interest was $210,000, against a budget of $260,000, a shortfall of $50,000. This year we're asking to keep the $300,000 overdraft limit. The cashflow's lowest month is September, at $245,000 overdrawn. That leaves $55,000 under the limit." It's short, honest about the shortfall, and clear about the ask. See the bank review questions: https://farmcfo.com.au/templates/bank-review-questions ### Check your understanding 1. What should the covering note do? Answer: Explain in plain words how the year went, what's changed and what you're asking for. The note saves the credit officer time and puts your explanation first. Leaving out the bad parts only means the bank finds them itself. 2. The cashflow's opening balance doesn't match the bank statement. Why fix it before sending? Answer: Mismatches make the credit officer dig deeper and trust the pack less. A pack whose numbers agree with each other is quicker to read and easier to believe. 3. Why include a poor-season test in the pack? Answer: It shows you've thought about a bad year and have a plan. The bank wants to know you can repay in a poor year, not just a good one. Showing you've already tested it answers that question. ## Lesson 5: Talking to the bank early The best time to talk to the bank about a problem is before it happens. Banks don't like surprises. A credit officer who hears about trouble from you, with a plan, has something to work with. One who finds it on their own starts asking harder questions. ## Keep in touch in good years too Regular contact builds trust. Send your management accounts when the bank asks for them, tell your bank manager about big changes, and invite them out to the farm. When a poor season comes, you'll be someone they know, not just a file. ## When to ring Ring the bank as soon as your cashflow shows any of these: - the overdraft going past its limit in a coming month - a covenant likely to be missed - a repayment you may not be able to make - the review pack running late ## What to bring Bring your updated cashflow, a short explanation of what's changed, and your plan. A plan might mean selling some stock earlier, putting off a purchase, asking for a seasonal increase in the limit, or a period of interest only. Interest only means you pay just the interest for a while, so the loan balance doesn't fall. What the bank agrees to is up to the bank, and each case is different. ## If things are tight The Banking Code of Practice asks customers in financial difficulty to contact the bank as soon as possible. Under the Code, a bank won't charge default interest on a farmer's loan while the land is in drought or a natural disaster, though you may need to tell the bank about it. Default interest is a higher rate charged while a loan is in default. You don't have to do this alone. The Rural Financial Counselling Service helps primary producers in financial hardship, or at risk of it. It offers free and independent financial information, options, decision-making support and referrals. It's funded by the Australian and state governments, and the national number is 1300 771 741. ## The habit that helps most Keep your cashflow current every month. It's what turns a surprise into a conversation months ahead. Our course on [your first farm cashflow](https://farmcfo.com.au/learn/first-farm-cashflow) shows how. The [interest rate change calculator](https://farmcfo.com.au/tools/interest-rate-change) shows what a rate rise would do to your repayments, so you can raise that early too. ### Worked example **An invented farm, for learning only.** In September, a cattle business updates its cashflow. Weaner prices have fallen, and the forecast now shows the overdraft at $320,000 in May. The limit is $300,000, so it's $20,000 over. The owner's plan is to sell 60 cull cows in December, at an invented $1,200 a head after costs. That brings in $72,000. The May low point improves to $248,000 overdrawn, which is $52,000 under the limit. The owner rings the bank in September, sends the updated cashflow and the plan, and asks about a short seasonal increase as a backup. That's eight months' notice, not eight days. Try the interest rate change calculator: https://farmcfo.com.au/tools/interest-rate-change ### Check your understanding 1. When is the best time to tell the bank your overdraft will go past its limit? Answer: As soon as your cashflow shows it, months ahead. Early notice gives you and the bank more options, such as selling stock earlier or a seasonal increase. 2. What does interest only mean? Answer: You pay just the interest for a while, so the loan balance doesn't fall. During an interest-only period you aren't paying any principal, so repayments are lower but the debt stays the same. 3. Why does regular contact with the bank in good years help? Answer: When a poor season comes, the bank already knows you and your track record. Trust is built before you need it. A bank that knows you and your numbers has more to go on when things get hard. ## Next step Bank Review Pack: https://farmcfo.com.au/bank-review-pack ## Sources - [Australian Banking Association, 2025 Banking Code of Practice (screen reader version)](https://www.ausbanking.org.au/2025-banking-code-of-practice-screen-reader-friendly/) - [ABARES, Trends in farm debt: Agricultural lending data](https://www.agriculture.gov.au/abares/research-topics/surveys/farm-debt) - [Agriculture Victoria, Rural Financial Counselling Service](https://agriculture.vic.gov.au/farm-management/drought-support/rural-financial-counselling-service) General information only, not financial, tax, legal or credit advice. These courses are not nationally accredited training.