Seven ways to support clients in farm debt mediation
Rising farm debt is a reality for many on the land and CAs need to know how to deal with financial institutions and farmers alike.
- Farm debt mediation rules can vary according to geographic location, the financial institution in question, and your client’s situation.
- The financial information you give your client is vital to a good outcome.
- CAs need to continue working with clients once the immediate negotiations are complete to ensure they comply.
By Felicity McLean.
Australia’s national rural debt of $67 billion looks relatively tame when saddled up alongside Canada’s total farm lending of $91 billion. Or New Zealand’s (relatively sizeable) $58 billion total. But rising farm debt is a reality for many on the land wherever they are.
This means chartered accountants are often involved in farm debt mediation – a structured negotiation process between a farmer and their creditor. “Chartered accountants are not strictly mediators,” explains Jonathan Forrest FCA, who is Director, Boyce Chartered Accountants in rural New South Wales and a CA ANZ Regional and Rural Advisory Committee member. “But your client can ask you to help them through the process and even accompany them to the mediation table.”
“Banks gain a lot of a confidence from this arrangement, too,” notes Bruce Debenham FCA, Director of Perks in Adelaide. Farm debt mediation aims for agreement on current and future financial arrangements – it is not an enforcement procedure. Mediation may be initiated by the farmer or the creditor and is triggered when there are concerns about the farmer’s capacity to service and repay a mortgage or loan facility. Forrest and Debenham have the following advice for chartered accountants navigating the mediation process:
1. Know your place
Every state and territory has different farm debt mediation requirements – some legislative, some not. “You’ll need to understand the rules that apply in your state as well as those that apply in any other states or territories where your client holds land,” notes Debenham.
Related: Chartered Accountants ANZ Farm Debt Mediation Guide
Check the Chartered Accountants ANZ Farm Debt Mediation Guide, which is part of the Rural Insight series, for details on the requirements in your state.
2. Know the financial institution
In the same way farm debt mediation requirements vary between states, they also differ between financial institutions, so check what’s required and how those specific requirements apply to your client. “The best way to do this is to contact the account manager directly,” says Debenham. “But remember that you’ll need your client’s permission to do so.”
3. Learn your history
A large part of understanding what the financial institution needs is learning what has occurred during the client’s relationship to date. Farm debt is frequently intergenerational debt and farm debt distress often comes with a long and sometimes difficult history.
“It’s critical you understand how your client has come to be in their current situation,” says Debenham, “and in particular, what correspondence there has been between your client and their financial institution.”
4. Data is all-determining
The financial information with which you equip your client may well be the deciding factor in the outcome of the mediation process. Data is key. The accountant needs to: collate all past and forecast financials that outline your client’s position; to help your client with a debt-servicing analysis; and to provide information about industry norms, relevant benchmarks and economic forecasts.
It’s not enough to just equip your client with an accurate picture of their financial situation, you must also help them articulate this. “Helping your client to speak about their financial state in an organised way can help them gain the confidence of their lender during negotiations,” explains Debenham.
5. Plan for the future
“Farm debt discussions almost always require a plan for the immediate future,” says Forrest. Help your client develop a strategy by considering ways to secure cash flow, as well as ideas for reducing debt and increasing equity.
6. Then plan again
While farm debt mediation has a high success rate (the Victorian Small Business Commission boasts a resolution rate of more than 90%), the outcome may not always be what your client was expecting. “Often farmers expect the bank will write off their loans or extend their loan facility, but that’s not the reality every time,” explains Forrest. For that reason, your client should go into mediation with more than one strategy in mind.
7. Stay the course
Once an agreement has been reached and you leave the mediation table, it’s not the end of the farm debt mediation story. You will continue to work with your client and the financial institution into the future – first formalising your client’s plans into a cash flow or forecast, then providing ongoing reporting and support. “Farm debt stress can be a very difficult time for your client,” says Forrest. “It’s important to let your client know you’re with them for the long run.”
This article has been informed by insights from Jonathan Forrest FCA and Bruce Debenham FCA.
Related: National Primary Sector Conference New Zealand
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Felicity McLean is an author and journalist.