Agriculture - Government-backed loans: research

ii) Interview Findings

This section reports the findings from interviews conducted with key stakeholders. These interviews aimed to provide greater insight into the need for government-backed loans for new/young entrants to agriculture, information on how loans could work in practice, and the challenges that could arise from taking this approach.

The need for government-backed loans

Support for new entrants

All interviewees agreed that there were challenges or a “problem” for young entrants in accessing finance. Some bankers also said that they would have to adapt to make it easier for young entrants to access finance.

Another interviewee said: “if we do not get the new entrants to bring some fresh ideas, then we will see the industry will stagnate”. Some interviewees volunteered more detailed areas where they felt new/young entrants were “driving the industry forward”; these included bringing new ideas from other businesses, improving environmental outcomes and increasing the use of technology and data.

The main arguments given for agriculture-specific loans were that long payback periods were required due to commonly low rates of return, and the scale and cost of entry into agriculture was high and are increasing. The main reason given was that existing UK government-backed loans were not suitable for many new/young entrants in agriculture was the maximum payback period of 6 years not being long enough.

Some interviewees said that they knew some farmers who had used the current government-backed loans to invest in new poultry enterprises, as the payback period was better aligned with the rate of return. One banker said that they had used them for tenant farmers who wanted to pay off a shed over 5-6 years. However, this interviewee agreed that current government-backed loans from the British Business Bank were not suitable for most farmers, including new entrants as :“Most debt for agriculture tends to be structured over a 25 year term”.

New/Young entrant differentiated loans

Interviewees discussed that it was more challenging for new/young entrants to access finance; however, some stated that this was not unique to agriculture: “if you've got an established business with a programme track record, it's always going to be easier to attract finance”.

Interviewees identified that there is currently one UK bank that offers a targeted product aimed at “people who want to come into agriculture”. At this bank, they lend more than for other products and provide an external advisor to support the applicant; however, the criteria for this product are stricter than for their other products. Other UK banks do not have a specialist product for new/young entrants; therefore, new/young entrants would apply for agricultural products available to the wider agricultural sector. One interviewee said, “we’ll look at every case individually… we just take everybody in their own manner, so don’t exclude anybody”.

Farmers may not be accessing available finance

Most banking interviewees raised concerns that (young) farmers may not be accessing finance that they were eligible for, as they were not aware of the standard assessment process, particularly when they lack security: “There's a belief that we'd only lend in security. It's just not true. We lend on…the ability of the business to repay [the loan].”

Many of the banker interviewees discussed the criteria or the standard assessment process for the products that they provided. One interviewee summarised this as: “character capability, the capital purpose and security”. Bankers talked about the range of criteria and questions they asked applicants to determine their capability, including looking at CVs, previous related experience, qualifications and family support. Some banks obtained this information through interviews.

Many interviewees emphasised the importance of having a good business proposal. Some also said that they were looking to see if the proposal had professional support behind it and whether the applicant was asking for an appropriate amount of money for their plans. One banker explained that you do not always need security, however if you are looking to borrow larger sums of money you are likely to need it.

In some cases guarantors were discussed to provide security to enable young/new entrants to borrow money.

The NFUS next generation committee and two bankers believed that few young farmers were being rejected for finance because they were felt to understand what lenders expected “I think they know that actually you need to have the bricks and mortar of the land or..30% to put (deposit) in”.

Other reasons farmers were perceived not to apply for finance included a lack of awareness of the products available, particularly the current government-backed loans. Some reported bad experiences with banks and challenges talking to bank managers, as there are fewer high street banks, and one interviewee suggested that these closures could be disproportionately affecting rural communities. One interviewee also discussed research showing that farmers have “greater risk aversion”. The interviewee went on to say that the values and culture of farmers and people living in rural areas meant that: “[they] don't always look kindly or positively on external finance. Debt is something to be avoided; it’s something you use when you're in trouble not to grow your business.”

This interviewee and others also said that the “the market has changed dramatically in the last 10 years with the growth of challenger banks and alternative lenders. Who don't come with a High Street presence. Often they're they deliver funding via intermediaries called commercial finance brokers. So … it's a complicated picture”.

Some also raised concerns about farmers and others' understanding of previous government-backed loans, such as the (COVID) Bounce Back scheme, as “free money from the government” that did not require repayment. Therefore, some suggested that if a scheme was to be explored, this should be made clear and marketed accordingly: “it's not a guarantee that they don't have to repay the money”.

Calls for further banking education

Some interviewees said that further financial education could support more young/new entrants to access finance. Most bankers discussed how they already supported young farmers by giving talks, starting conversations with farmers, providing templates to support applications and providing mentors to young farmers. However, some felt that this could go further to include education in schools.

A range of measures are required

Interviewees mainly stuck to the topic of government-backed loans, most talked about a range of different finance products, and some explicitly stated that a range of measures should be supported and explored further. This included maintaining grants; there were concerns raised that a loan scheme could replace grants. Other suggestions to be explored included venture capital, angel investors and stocking finance.

Stocking finance from auction marts, banks and supermarkets was discussed by both bankers and the NFUS Next Generation Committee as one of the main ways that young farmers were accessing unsecured finance. It was suggested that gaining a better understanding of these schemes could help create new products that could further support new/young farmers.

One banker also spoke about how Scotland could introduce an agricultural charge like in England. It was explained that this allowed the bank to look at other personal assets belonging to the applicant and that these could be taken into account as security when deciding whether to lend money.

How could government-backed loans work?

Banking sector involvement

The banking sector in Scotland appeared positive about the prospect of government-backed loans for new entrants. Many interviewed said they were interested in sitting down and working together to explore how new/young entrant finance could be improved.

“I have no doubt that my senior team would be delighted to sit down with those in government to at least start the ball rolling in terms of a discussion … like what would it look like? How would it work? How would it fit with our product?”

“I think it’d be fantastic”

Some also said that they had previously been involved in discussions about young/new entrant finance for some time with the Scottish Government: “I think there have been so many discussions around this over so many years, and the reality is the only thing that keeps stacking [adding up] is this (Government-backed loans).” It was also suggested that these discussions should be more regular to ensure momentum.

Use the frameworks of other products

British business bank products

The most common suggestion by interviewees was to look at products already provided or recently backed by the British Business Bank. Suggestions included the recovery loan scheme, the Growth Guarantee Scheme, and the business booster schemes.

One interviewee articulated their vision, which was similar to that of other bankers:

“I would say you would probably want to go to the British Business Bank and establish this…Is it just the Scottish Government? You've got fuel down South, you've got fuel in Wales, you've got fuel in Northern Ireland… They [British Business Bank] would probably be able to administer, a lot of it[a scheme] for you. So that would work and they would also be able to liaise with banks.

Another suggestion was to use the residential help-to-buy scheme as a framework, these are a range of devolved schemes that have enabled homeowners to buy houses with small deposits (usually as low as 5% of the home value), where the government provides an equity loan (usually between 5-40% of the home value) and a mortgage is taken out to fund the remainder of the purchase.

“a different way, not a better way, a different way for people that haven't got that resource is to have effectively a bit like the residential help to buy scheme. So on the residential help to buy scheme, lenders are given a guarantee^[69]… So we're talking Scottish Government … do the top up between the 70 and a figure.”

Explore further how the new generation bank scheme works

Interviewees suggested that gaining a better understanding of how the one identified new-entrant specialist bank product worked could be beneficial.

“that bank has a programme for new entrants, I would be thinking maybe we should go and talk to that bank…That seems like a logical next step. You know if you can pull something off the shelf…as opposed to like starting fresh.”

Use external advisors to manage risk

One of the main ways suggested to reduce risk and increase the confidence for banks to lend and to support young farmers was to use external consultants to provide/support for the development of business plans for new/young entrants. Some bankers stated that they look for professional plans and it was recognised that some banks financially support external consultants to support applicants. A participant suggested how this could work for a new scheme:

“What I would like [is for] a new entrant to come to me with a consultant prepared proposal [so it]is being vetted by … the consultant. I would then assess that proposal and make a decision”.

Challenges

Many challenges were raised by interviewees regarding the setting up of a government-backed loan scheme.

Loan eligibility

It was raised that government-backed loans may not greatly increase the number of new/young entrants able to access finance. One interviewee said: the government guarantee might not increase the number of new entrants getting loans significantly:

“if we think they are good risk, we'll lend them that money…If we think that [they are] a bad risk or a or a poorer risk… we don't want to lend them that money just because we've got a government-backed guarantee, shouldn't change that decision.”

Another interviewee highlighted the wider challenge in servicing a loan to purchase a farm due to the high costs of land, stock and machinery.

“I think it'd be very difficult to prove serviceability for a new entrant coming in and setting up and buying a farm, stock and potentially machinery”.

This interviewee gave specific examples of new/young entrant farmers having other careers, working hard to save for a deposit, diversifying and receiving family support to obtain finance to purchase land. This, however, could become less of a problem as interviewees said many new entrants were no longer looking to purchase land as it was out of reach.

Demand

Many interviewees discussed the number of young/new entrants that they felt would use the loan scheme. Most said that it was difficult to estimate; however, most who suggested a figure thought it would be low.

“I believe it's important to have something to support people to come into the sector in that way, but I don't think you're going to find 100 people a year coming out right, so Next Gen (NFUS Next Generation Committee) probably will give you a better number on it, but I suspect it'll be low teens.”

For banks and the government to provide such loans, it was felt that there needed to be sufficient demand:

“if the scale of demand is five people a year … you're not going to be able to solutionize that or get the buy in from government and the lenders to be able to work with it because you're going to have to have some governance that sits behind it, some kind of sign off process that sits behind it. And if it's one request a year, it won't work.”

The cost and value for money associated with small schemes was also considered by some interviewees. One said that they expected: “Probably six or seven farms. Then the cost would be astronomical.”

A further complication was the suggestion that more than one scheme may be required e.g. one for secured lending and another for unsecured lending, splitting the demand for each scheme.

Making a case to amend existing government-backed products

One of the main approaches suggested by banking interviewees was to modify current lending schemes; however, one interviewee suggested that a strong case would need to be made: “they [UK Government]…need to be convinced as to why”.

One interviewee felt that it was unlikely that a case could be made to amend the existing schemes solely for agriculture. They went on to say that the creation of a “niche category” for agriculture would be “really difficult” and could impact “the integrity of the programme itself.”

Setting up the scheme

One of the biggest challenges in setting up and administering a government-backed scheme was bureaucracy and cost.

“But you know, while in theory it sounds relatively straightforward, by the time the solicitors and everybody else gets involved, it won't be.”

Pricing the scheme was also considered to be a challenge as the applicants were potentially more “risky” and some therefore felt the finance may be more costly than what is currently available. Some felt that the finance should be very cheap to support the young/new entrants. There were concerns raised about how it would be perceived more widely if the agriculture sector was seen to be getting special treatment.

If the scheme was set up to work with the banks as lenders, the scheme parameters and demand would be required to be appealing for them to “sell”. It was highlighted that not all lenders offer British Business Bank products.

The guarantee

Most interviewees suggested using the British Business Bank to guarantee the loan as opposed to Scottish Government itself. However, as the product could be Scottish a few suggested that the Scottish National Investment Bank should be involved.

“I don't know how the Scottish investment bank would work, but there's a place for them to play in this.”

Interviewees were not sure of the remit of the Scottish National Investment bank nor whether such a scheme would be in their remit; however, all bankers were familiar with the British Business Bank guaranteed loan schemes.

Banking interviewees gave proposed values for the level of guarantee they felt would be required to ensure the success of the scheme. These ranged from 20% to 100%. Some talked about how much would be required for their bank to be involved and others discussed the amount that would see change.

“we want that 100%. Then you'll get a lot more yeses and a lot quicker…I think if you want to move this at pace you do”.

Differentiated products

As previously stated, some bankers felt that differentiated products would be required for secured and unsecured finance. Some said that most banks look for “bricks and mortar security” or “land-based security”. Lending money to buy land was seen as a reasonably safe investment by most interviewed as “historical land market values have only usually gone up on land”. One banker discussed that if the land is to be realised that the bank should not lose money:

“we will typically lend 70% of the value of the land”. This is so that “if there’s a realisation situation, they [the bank] should still get their funds”.

One banker thought that this should provide confidence to the Scottish government to support loan payments, as strong land markets mean that the land asset could be realised and there could be a surplus.