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The 'three Ps' of finance

If you're starting a farming business or expanding and diversifying your current one, understanding the needs of your lender-and the financial ebbs and flows of your business-is essential to your success

Words: Matthew Cawood

Whether you're growing your existing enterprise or starting something entirely new, securing funding for your vision is the ultimate stress test of your idea. Finding the seed capital to get you started requires convincing the right people that your idea has merit and that it is profitable enough to yield a return on investment.

The process should start with a solid understanding of what your idea is, how it will work, and why customers will be interested in the end product or service. But a great product or idea is really just the start; you also need to be able to explain how you will turn your idea into profit and demonstrate the future cash flow that will come from it.

Veteran Agribusiness Consultant Mike Stephens suggests it can all begin, literally, on the back of an envelope. Stephens established his advisory service, Mike Stephens & Associates (MS&A), in Victoria in 1983. He urges those considering new finance to bring their calculations down to the basic unit of production-a tonne of grain or a kilo of beef, lamb or wool.

Analysing the returns and payments contained within that base unit will quickly show whether there is any room to pay off a financing arrangement, Stephens says.

"If the figures look all right, what will happen if you hit a bad year? Can you manage? These are back-of-the-envelope calculations," he says.


"This approach takes the emphasis off equity and places it on the profitability of an enterprise. "


If the sums add up, it's time to look for a lender.

Ian Robinson, the Wagga Wagga-based partner of agribusiness funding specialist Robinson Sewell Partners, says there are two broad options for would-be borrowers: equity capital and debt capital.

Equity capital can dilute ownership of an enterprise, potentially compromise the principal's management role and be very expensive, he says. Debt capital keeps the principal in control of their business.

There are hybrids between the equity and debt models, but Robinson thinks most hybrid solutions have more complexity and generally a higher cost than direct borrowing from a bank. "From my experience, bank funding is the cheapest form of finance that people can apply for."

When approaching a bank, a good product or a great idea is not enough, says Scott Flaxman, Senior Content Manager of Westpac's Davidson Institute, the bank's financial education unit dedicated to financial literacy and confident financial decision-making.

"Our experience shows that a lot of people think, 'If I can either make it or sell it, everything else will roll along,'" Flaxman says. "They think the money will take care of itself. But what we've found is that without a good understanding of the fundamentals, that isn't necessarily true."

A good framework to consider, says Flaxman, is "the three Ps of finance: Purpose, Person and Payback".

'Purpose' tells the lender why they should lend to you in the first place. "The bank wants you to succeed and wants to lend you the money," Flaxman says, "but it wants to understand your position so it's successful for you."

'Person' refers to the qualities that you, the borrower, bring to the transaction. That includes the team behind you-advisers, administrative support and mentors.

The final element of the three Ps is 'Payback'. This is all about cash flow forecasting. You should be able to demonstrate the seasonality of your cash flow, Flaxman says, and what processes are in place to manage the ebbs and flows of income in ways that ensure the long-term sustainability of the venture.

Banks work closely with their clients, building strong relationships to support them in their business ventures. The most successful ventures understand how cash flow works and how to measure performance within a business.

"If the customer starts to think in terms of cash flow and the balance sheet, there's a very good chance the business will be stronger, because they will have systems and processes in place to monitor their overall financial health," Flaxman explains.

"A healthy cash flow opens up the opportunity to grow the business or take on opportunities when they pop up, because you have that extra capability."

Businesses at different stages of their evolution should approach their bank accordingly. For the new entrant into farming or any form of agribusiness, any approach to a lender has to be preceded by the development of a business plan. That plan has to be realistic and not overly bullish, says Scott Sharman, Operations Manager at MS&A. Experienced lenders will quickly see through the figures. It also has to be professionally presented and, along with a good set of numbers, it has to tell a good story.

Anything that can help the application should be brought to bear: a successful past trading history, relevant education or money already bet on the venture. "If a family member can kick in $100,000 to get you started, it tells the bank that someone else is prepared to back you," Sharman says.

Strategies for risk mitigation also help, like pre-existing supply contracts. Careful consideration also needs to be given to business structure ahead of raising finance, Sharman advises, "so you have the flexibility to borrow money, handle tax, pass the assets on and protect assets in the case of a legal challenge". That structure can be laid out as part of the proposal.

A mature farm business looking to consolidate, or one aiming to diversify its income base, should use similar principles to the first-timer, but with additions.

For instance, Sharman says, a good past trading history is a strong negotiating asset. "If your past performance hasn't been that flash, you have to tell the bank what you're going to do differently so the bank can have confidence in you."

If the objective is to diversify into new enterprises or investments, fundamental business skills are transferable. Expertise is not. Sharman suggests finding an experienced adviser to lean on during the transition, to reassure the bank over any lack of experience in the new field. The bank will also have new questions to ask, such as what level of equity will emerge from the diversification.

While the bank's decision to provide credit ultimately rests on your ability to return the loan, you shouldn't overlook the importance of maintaining a good relationship with your lender. The more open you are about your business plans, and about your ongoing successes or points of difference, the more your lender can help you to grow and manage your business. This is equally true for both new entrants and existing enterprises.

As Sharman says, "It's definitely not all about numbers."

Considerations for obtaining bank finance

For new entrants

  • Diversify your backers. Will someone else back you financially? It's a sign that others trust you with their money.
  • Mitigate risk. Have you planned for the possibility of a complete wipe-out of production within the first three years, through drought, flood or some other event, before you're financially on your feet? Can you buffer risk by buying fewer animals, agistment or sharefarming?
  • Your resourcefulness versus your resources. After a lengthy study, first-generation farmer and Welsh Nuffield Scholar Michael Blanche concluded: "It's not 90 per cent about the system; it's 90 per cent about me." (

For existing enterprises expanding or diversifying

  • The past is a guide to the future. Detail past business experience for the lender. If you're going into an entirely new field, bring in advisers who can support decision-making.
  • Look for lazy assets. For instance, do you have a farm cottage that you could rent out to contribute to your income?
  • Build for the future. Take advice on how to structure your business to meet future goals such as family succession or retirement. Too often, the fruits of labouring are locked away in poor business structures.

For all prospective borrowers

  • Do some rough sums. How does your enterprise stack up financially? What will it cost to produce a single unit (tonne of grain, kilogram of meat), and how much is left as profit? From that profit, how much can you afford to allocate to repayments on finance?
  • Plan. Write a clear, concise business plan that illustrates the 'three Ps': your Purpose, the attributes of the People involved (especially the borrower) and your strategy to provide the bank with consistent Payback on its loan.
  • Map the territory. Industry resources are plentiful on the internet. Meat & Livestock Australia ( specialises in red meat production; Grains Research and Development Corporation ( specialises in grains. Expert information to support decision-making is available for all sectors of agriculture.
  • Be financially literate. Again, internet resources abound, including Westpac's Davidson Institute (, which offers articles, newsletters and webinars on financial management.
  • Assemble a team you trust. You need experienced people behind you to advise on the opportunities and challenges of the business.
  • Relationships are everything. Are you comfortable with your lender and is your lender comfortable with you? Agribusiness is a long-term venture, so relationships are all-important.