The Scottish Government has been congratulated on offering bridging loans to farmers to help them overcome impact of adverse weather. But fears have emerged that the loans could mean farmers will have a cash shortfall when the loans have to be repaid.
That's the observation from Adam Tyler, executive chairman of the Financial Intermediary and Broker Association (FIBA), as the National Basic Payment Support Scheme was launched.
The scheme, which was announced by Rural Economy Secretary Fergus Ewing, allows loans to be made available to eligible farmers of up to 90 per cent of the value of their annual payment from the European Union.
Following a spell of troublesome weather (including the so-called Beast from the East cold spell then a summer heatwave) the loan payments will be made to farmers from early October, as opposed to ordinarily being paid between December and June.
Mr Ewing said: “Farmers have suffered this year due to the unprecedented severe weather and the Scottish Government is committed to supporting our farmers and have responded by taking action to make this extra funding stream available.
“We will be issuing loan offers shortly, providing a much-needed cash injection for those feeling the effects of increased prices for feed and fodder, the impact of restraints on irrigating their land and in some cases resorting to selling livestock earlier than planned to preserve fodder for breeding stocks.” A similar scheme created last year delivered payments of more than £317million to around 13,500 farmers, it is said.
But FIBA chief Tyler, while applauding the scheme, says it is unclear if farmers will end up with a cash shortfall. He said: "It is good to see that the Scottish government has been quick to grasp that farmers have struggled because of the weather conditions but also quick to see the PR opportunity of looking more proactive than its Westminster opposite number!
"What is being offered is effectively an opt-in scheme whereby eligible farmers can apply for a loan of up to 90 per cent of the value of their annual payment from the EU and designed to tide farmers over this rough patch.
"My concern would be that, in normal years, the EU payment would be used by recipients for other purposes and presumably repayment will be made when the EU payment falls due. So, it might very well help in the short term, but does that mean that farmers will have a cash shortfall when the loans have to be repaid?
"The principles behind traditional bridging finance are similar to what is on offer. A cash injection on a short-term basis, but depending on the terms agreed with the farmers, a traditional bridging arrangement would include a transparent and agreed exit strategy for repayment. Normally, that would either mean transferring the loan to one of longer duration or by sale of the asset on which the loan was made."
In the case of Scottish farmers, the security for one of these loans would be based on the guarantee of the EU payment covering repayment of the loan, says Tyler.
"Bridging lenders in the UK play a vital role in providing SMEs and individuals with finance that is required immediately or faster than traditional sources of funding can be delivered. Since the financial crisis of 2007/8, when so many traditional funding sources severely cut back or stopped their lending, bridging finance was an important resource in helping businesses manage acquisition and cashflow challenges.
"In 2018, the UK bridging market continues to offer valuable immediate financial support to SMEs."
Meanwhile, Benson Hersch, chief executive of the Association of Short Term Lenders (ASTL) said: "This shows that bridging finance is multi-dimensional. Lenders are able to adapt to customers’ needs as their attitude is ‘how can I help?’ rather than, ‘we can’t do this’. As knowledge of alternative finance spreads, so will its use."