4 minute read
Financial Security 101
The world of finance is one of complexity, and in Agriculture where irregular cashflow cycles are the norm, finance is common place. Behind all finance requirements, be it crop inputs, livestock purchases, machinery purchases/leasing, land purchases/leasing or capital improvements, the financier (the company lending you the funds) will require ‘security’ to protect their risk. In this month’s article, we’re going to unpack the most commonly used securities.
Let’s start with some fundamentals;
– What does it mean to have a ‘secured interest’? A secured interest means that in the event of default (for whatever reason) the lender has rights to that item ahead of non-secured parties.
– Purpose. Lenders use security to protect their investment in the event that something goes wrong, for example the borrower cannot meet their repayments. Usually the lender won’t lend 100% of the value so in the event of default, their exposure is less than the item requiring the loan. This insures against unforeseen costs such as legal fees, interest costs or lower resale value.
– First in, best dressed. Generally, the first registered lender is more likely to recover their investment verse those who come after. Note – Lenders who are second or third down the line, will often add additional costs to the deal to cover the risk of insufficient value in the item to cover their investment (after first secured parties have taken their money/value).
–Removing a security. Generally speaking, a security can only be removed by the company/person who has registered it. Security is only discharged once the risk of default is zero.
What forms of security are out there?
Mortgage over property. Very commonly, a mortgage over land title is used to secure a deal. Mortgages are registered with the “titles office” a process that varies in each state and territory. The mortgage remains there until the lender’s risk is zero. When there is a mortgage in place, the users of the land may be restricted in what they can do without the permission of the mortgagee. These include things like taking on additional debt, subdividing land or leasing or selling the property. Mortgagees may also require the user to insure the property. Once the mortgage has been repaid, the lender will discharge the mortgage and give title to the owner.
Personal Property Security Act. The PPSA is specifically designed to give users a security interest in a ‘good’ that can be removed from a property or have a registration number such as a VIN or chassis number or National Livestock Identification System registrations. You cannot use the PPSA for land. Note – the PPSA is commonly and somewhat incorrectly referred to as the PPSR ‘personal property security register’. The PPSR is actually the national database users’ access to see the security registrations.
Directors Guarantee. Is a personal guarantee signed by a company director making them liable for all the company’s debt or commitment should the company not be able to meet its obligations. Directors guarantees are requested for smaller companies or when there are limited assets.
Asset financing. Allows assets like property, machinery, equipment or livestock to be used as security for a loan. Depending on the asset, financiers can loan up to 90% of the asset’s value.
Which type of security is best?
Usually lenders will stipulate which security they wish to take to offset their risk. Usually it’s a direct interest in what they are lending, for example a tractor if they are an equipment business. Their decision will be guided by what gives them the best chance of recovering their debt/investment. Sometimes alternative security can be given to secure a deal, for example livestock or grain contracts. Agfarm Accelerate utilises the PPSA to secure crop input finance. In this example there are two key reasons for using this type of security:
–Fit for purpose. Registering a specific security interest in a crop via the PPSR is low cost, quick and relatively easy. Registrations are easily identified and accepted and understood across the grains industry.
– Flexibility. Registering an interest specifically in crops doesn’t impact other security interests such as land or machinery. The borrower can continue to leverage those assets as required. Further, registration is easy to remove once the debt is repaid.
What is Agfarm Accelerate?
Agfarm Accelerate is a line of credit for all your cropping needs; agchem, fertiliser, seed, irrigation water, land lease payments, crop insurance and fuel. It’s secured against your future summer and winter crop production and repaid after harvest. For more information on Agfarm Accelerate and how it can assist you with your cropping program this season, give one of Agfarm’s Regional Managers a call on the details below.
WA Regional Manager | 0439 625 853
SA Regional Manager | 0438 128 472
QLD & NSW Regional Manager | 0400 873 777
VIC Regional Manager | 0447 743 556