Frontpage News 2014 New start-up loans...

New start-up loans help farmers in the bank

26 September 2014

Analysis: a risk capital injection can help farmers considerably when applying for bank loans. New calculations of the Danish Growth Fund’s agricultural customers show that 1 Danish Krone from the Danish Growth Fund has resulted in an additional 2.8 Danish Kroner from the bank.

Many Danish companies still struggle with a low solvency. This especially applies to agriculture. It can make it more difficult to get a credit approval for a loan in the bank, because the solidity historically has proven to help determine the outcome of a loan application. Other important factors are documented earning capacity, provision of security etc.

It is in the public interest that Danish companies continue to invest in new machines etc., which strengthen their productivity and competitive power. Therefore, it is important that solidity is strengthened through risk capital.
 

New start-up loan is a great example

A great example of risk capital is the new start-up loan for agriculture, which has just been introduced by the Danish Growth fund. A review of the Danish Growth Fund’s existing customer shows that a growth loan for agriculture on average have led to co-funding from banks or mortgage credit institutions in the range of 2.8 times the size of the growth loan itself.
 
Figure 1. Co-funding within agriculture as a result of growth loans
Source: Danish Growth fund.
Note: The figures are calculated on the basis of the Danish Growth Fund’s existing agricultural customers.

 
Banks are thus ready with funding, when the risk for the upper parts of the credit is borne by other investors.
 
Particularly, agriculture has been badly hit on the solidity in the wake of the financial crisis. However, it is expected that the side benefit in terms of bank funding is present everywhere in the business community, as many other industries are in better financial shape than agriculture.
 

Profitable companies with low solvency

The figures from the Danish Growth Fund also show that those companies, which are customers of the Danish Growth Fund, are characterized by a strong core business, but suffer from relatively low solvency, cf. figure 2.
 
Figure 2. Key figures for dairy farms in the Danish Growth Fund’s portfolio.
Source: Danish Growth Fund and Knowledge Centre for Agriculture.
 
 
It is evident that customers are characterized by profitable operations, which are slightly above the general level for this part of the agricultural sector. On the other hand, the solvency ratio is significantly lower.
 
The Danish Growth Fund’s role as provider of risk capital is focused on the parts of the business community which have a strong core business, as they – like other asset managers – have an obligation to select the healthy projects.
 

Strengthens the opportunity for generational shifts

In these years, agriculture faces a number of challenges. There is especially a great need for change of ownership. In 2013, the share of farmers over 35 years was 93 percent.
 
Figure 3. Farm holdings in agriculture, allocated based on age
Source: Statistics Denmark and the Danish Bankers Association’s calculations.
 
It is a very big challenge for the young farmer to obtain the necessary risk capital for change of ownership, since an average farm costs about 40m Danish Kroner today.
 
The new figures from the Danish Growth fund show that the Fund’s growth loans can be the decisive factor in securing change of ownership. Thus, 19 percent of the guarantees , which have been granted to agricultural, has been allocated to generational shifts and change of ownership.
 
Figure 4. The Danish Growth Fund’s agricultural customers, allocated based on purpose
Source: Danish Growth Fund
Note: Calculations based on the Danish Growth Fund’s customers with guarantees.
 
The group behind the Growth Plan for Food has proposed to liberalize the law on agricultural property in order to eliminate the barriers for establishing investment trusts within agriculture. This change will make it more attractive for investors like pension- and private equity funds to enter the industry, which is predominately driven as privately held firms.  This, in spite the fact, that agriculture has undergone a development where farms have become larger capital-intensive businesses today, which require professional management covering many different competencies.
 
We need to think in new ways of funding agriculture. There is a need for greater diversity of ownership forms and that different source of funds, including bank and mortgage credit, work together.
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