Farm finance: funding machinery, land and seasonal cash flow

A dairy farm is paid every month for its milk. An arable farm may see most of its income in a few months after harvest. A beef or sheep enterprise is paid when stock is sold. Meanwhile seed, fertiliser, feed, fuel, wages and rent go out all year round.

That pattern shapes every borrowing decision on a farm. A loan with equal monthly repayments might suit a café. On an arable farm, it can mean repaying from an overdraft for most of the year. This guide covers the main types of farm finance and how to fit each one to your farm's cash cycle.

Why farm cash flow is different

Three things set farming apart:

• Income is lumpy. Depending on what you produce, a large share of the year's income can arrive in a few weeks or months.
• Costs come first. You pay for inputs months before the crop or stock that they produce is sold.
• Prices and yields move. Weather, disease and commodity prices can change a year's income sharply, and you won't know by how much until late in the season.

Farms are also asset-rich and often cash-poor. Land, buildings and machinery can be worth a great deal while the bank balance runs low. Lenders that understand agriculture know this, which is why specialist farm finance exists.

Machinery and tractor finance

Most tractors, combines, sprayers, telehandlers and other kit are bought with asset finance. The two main types are hire purchase and leasing.

• Hire purchase (HP). You pay a deposit, then instalments, and own the machine once the final payment is made. For tax, you're usually treated as the owner from the start, so capital allowances can apply. The Annual Investment Allowance lets many businesses deduct the full cost of qualifying machinery from profits in the year they buy it, up to a limit. Check the current limit on GOV.UK and ask your accountant how it applies to you.
• Leasing. You rent the machine for a set period and don't own it. A finance lease usually runs for most of the machine's working life. An operating lease is shorter and suits kit you plan to replace regularly. Rentals are generally treated as a business expense rather than qualifying for capital allowances.

Our guide to hire purchase vs leasing explains the differences in full.

Seasonal repayment profiles

This is where farm finance differs most from standard asset finance. Many agricultural lenders will shape repayments around your income rather than insisting on equal monthly payments. Common options include:

• Annual or half-yearly payments, timed for after harvest or after your main sales.
• Payments that vary by month, higher when income comes in and lower or nil in lean months.
• A deferred start, so the first payment falls after the machine has earned its keep, for example a new drill bought in spring with payments from the autumn.

Flexible profiles don't make the machine cheaper. If you pay less early on, you're borrowing more for longer, so the total interest can be higher. What they do is stop a machine you need from starving the farm of cash in the months you can least afford it.

An illustration, not a quote. Say you're buying a £120,000 tractor on HP with a £24,000 deposit, and the lender's charges over five years come to £18,000. You'd repay £114,000 in total after the deposit.

On a monthly profile, that's 60 payments of £1,900. On an annual profile, it might be five payments of £22,800, each due in October after harvest. The total is the same in this example. In practice an annual profile often costs a little more, because you hold the money longer before each payment.

The monthly plan suits a farm with steady income, such as a dairy. The annual one suits an arable farm whose income mostly arrives in the autumn. Real figures depend on the lender, the machine and your farm.

New or used

Used machinery is widely financed, though lenders look at age, hours and condition, and may want a shorter term on older kit. Well-known brands of tractor tend to hold their value, which helps when you finance them.

Buying land or buildings

Land and permanent buildings are usually funded with an agricultural mortgage: a long-term loan secured on the property, offered by banks with agricultural teams and by specialist farm lenders.

Compared with a standard commercial mortgage, agricultural mortgages tend to have:

• Longer terms, sometimes 25 years or more, reflecting the long-term nature of farming.
• Flexible repayment options, such as annual or half-yearly payments, or an interest-only period.
• Lending based on the whole farm business, not just the property, because the lender is relying on farm profits to repay.

Lenders will usually want a deposit, a valuation, your accounts for the last few years, a budget showing the farm can afford the repayments, and a plan for how the new land or building fits the business. Expect them to look closely at how much of your income depends on government support, and how that's changing.

Buildings can also be funded in other ways. A new grain store, livestock shed or slurry system might be paid for with a term loan, or partly with asset finance where the structure counts as equipment.

Seasonal working capital

For the gap between paying for inputs and getting paid for produce, most farms use a short-term facility:

• An overdraft is the traditional answer. You draw what you need and pay interest only on what you use. It can usually be withdrawn by the lender, so don't rely on it for long-term borrowing.
• A revolving credit facility works in a similar way, but is usually agreed for a fixed period, which gives more certainty.
• Supplier credit. Many agricultural merchants and feed suppliers offer credit terms on inputs, sometimes until harvest. Check the cost carefully, because it isn't always clear.

Our guide to overdrafts vs revolving credit vs loans explains how these compare. The rule of thumb is the same as for any business: use short-term facilities for short-term gaps, and long-term borrowing for long-term assets. Funding a tractor from the overdraft leaves too little room for next spring's inputs.

Livestock and diversification

Livestock can be financed too. Some lenders fund the purchase of breeding stock over several years, or the purchase of store animals that are repaid when they're sold finished. Lenders look at your experience, the health status of the herd or flock, and your marketing plan.

Diversification projects such as holiday lets, a farm shop, a wedding venue, renewable energy, or storage and workshop units are treated as new businesses in their own right. Expect a lender to ask for planning permission or a clear route to it, costings, and evidence of demand. Because the project has no trading history, you may need to support the borrowing with security on the farm or with the farm's existing income. A project that relies on the farm to pay for it is fine, as long as the farm can genuinely carry it.

Grants and government support

Government support for farming has been changing significantly across the UK, and the schemes differ between England, Scotland, Wales and Northern Ireland. In England, the old area-based direct payments are being phased out, and support is moving towards payments for environmental work and grants for specific investments.

Because schemes open, close and change, we don't quote scheme names or amounts here. Check GOV.UK for the current position in England, and the relevant devolved government for Scotland, Wales or Northern Ireland. Two practical points:

• Grants are often paid after you've spent the money. You may need finance to cover the cost until the grant arrives, so plan for that.
• Lenders look at how reliant you are on support. If a large share of your profit has come from payments that are reducing, expect the lender to test whether the farm can still afford its borrowing without them.

Partnerships, sole traders and regulation

Many farms are run by sole traders or family partnerships rather than limited companies, and that affects which rules apply.

Lending of £25,000 or less to a sole trader or a small partnership (two or three partners) is generally regulated by the FCA, which gives you extra protections but means fewer business lenders offer it. Larger amounts are generally treated as unregulated business lending. Loans to limited companies and LLPs are generally unregulated whatever the size.

A loan secured on land that includes your home can also be a regulated mortgage. Broadly, that applies when at least 40% of the land is used as a dwelling by you or your family, so most farm mortgages aren't regulated, even when the farmhouse is included. Ask the lender whether yours is regulated before you sign, and take independent advice if you're putting your home up as security. If you're asked for a personal guarantee, make sure you understand what you're signing.

Common mistakes to avoid

• Equal monthly payments on lumpy income. If your income comes in two or three lumps, ask for a repayment profile that matches it.
• Using the overdraft for machinery. It eats the headroom you'll need for inputs.
• Assuming support payments will continue. Budget on the basis that they may fall or change.
• Ignoring succession. A lender committing for 20 years or more will want to know who'll be running the farm in that time. Have the conversation before they ask.
• Comparing rates, not totals. Ask every lender for the total amount repayable, including fees, under the repayment profile you'd actually use.

Questions people ask

Can I get tractor finance with annual repayments?

Often, yes. Many agricultural lenders offer annual, half-yearly or seasonal repayment profiles timed to your harvest or main sales. Total interest can be a little higher than with monthly payments, because you hold the money for longer.

How long is an agricultural mortgage?

Terms are usually longer than for a standard commercial mortgage, sometimes 25 years or more. The term and repayment structure depend on the lender, the property and the farm's finances.

Is farm finance regulated?

It depends who's borrowing and how much. Lending of £25,000 or less to sole traders and small partnerships is generally FCA-regulated, while lending to limited companies and LLPs generally isn't. A loan secured on land that's mostly used as a home can also be regulated.

Are there government grants for farm machinery?

There have been grants towards some equipment and technology, but schemes change often and differ across the UK. Check GOV.UK, or the relevant devolved government, for what's open now. Many grants are paid after purchase, so you may need finance in the meantime.

Can I finance a farm diversification project?

Yes, but lenders treat it as a new business. Expect to show planning permission, costings and evidence of demand, and you may need security on the farm or support from its existing income.