Financing a Farm
The following content will focus on types of financing available for farms and the different configurations. The article is not on providing finances for your property but a guide and a look into financial information when thinking of buying a farm.
The information will zoom in on basics and procurement of securing finances through financial institutions in South Africa. For more details you can pose questions at any of the banks or financial providers.
South Africa’s Unbalanced Economy
It is imperative to have good knowledge before buying land for farming purposes. Fundamental concern should not be only funds, but for what purpose will you use the land for. There are game farms, livestock, and agricultural farming. All these can yield a profit in the long term, the question is will you be able to keep and maintain debt repayments? In today’s globalized world, corporations have centralized their means of production. Meaning that groceries and retail shops already have agreements and contracts with big farms that provide them with produce every month.
If you are buying a farm to sell to retailers you will need to think again clearly through the process of originating profit. Corporations do not only have local producers but buy internationally. The market in South Africa is very narrow and limited. Every mall has the same groceries stores and retail outlets. Entry to these big retail shops will be hard, as they have existing relationships with their food producers and international farmers. These farms produce vegetables and fruits, also meat.
The economy in South Africa is unbalanced works for big 4 to 5 institutions, for example, big 5 banks, big 5 retailers, big 4 patrol garages, big 4 cell phone network providers and so on. The economy in this nation is concentrated at the hands of very small few. Before you buy a farm you will need to have access to this small pool, if not you will struggle. You will have to sell your produce to fruit and veg vendors, who also have existing agreements with small to medium scale farms in the country. These are the hard facts you will need to look at. The best way forward will be to break up these monopolies that are limiting economic growth and allow more access points to the economy. One can still make it but it will be through hard work.
BUYING COMMERCIAL FARMS – Banks usually approve 50 to 70% of the total value of the property (farm land). All banks will endorse a loan when they know you can afford monthly payment over a period of time. This will mean your farm must be productive or at-least have contacts to produce food for a supplier or retailer.
MOVEABLES – Are financed by banks for a short time period. These are assets bought as a “going concern” and this includes is livestock, implements etc. These items are usually bought separately. Before approval banks will assess your financial state and you will qualify once you have proved financial security for the loan.
COUNTRY LIVING – GETAWAYS – SMALLHOLDINGS: This has gained popularity in SA over the years. Sizes of hector and value of the land will determine the amount you can procure with the banks as it falls under normal home loan financing. Usually banks will finance 80 to 90% of the loan. For approval you will need to have enough funds to service the loan over the payment period. Buying a veldt, mountainous area or undeveloped land has to be done as a cash transaction. Banks do not fund such pieces of land.
LAND BANK FINANCING – The Land bank has well developed instruments to measure production output and market value of the farm. They do this to secure their clients against unmeasured risk to farming in the procurement for a loan.