RIC Drought Loans

PIC - Fencing.jpeg

The Federal Government has recently announced some updates/changes to the Drought Loans administered by the Regional Investment Corporation (RIC). Full details have not been released yet but following is a summary of the information currently available.

To be eligible for the loan a business must:

  • Be located in an eligible area

  • Have a drought management plan

  • Be in financial need of a loan

  • Be financially viable in the long term

  • Keep at least 50% of the debt with a commercial lender

Other details are as follows:

  • Maximum loan amount is $2 million

  • The loan can be used for any business-related activity such as:

    • Fencing

    • Machinery upgrade

    • Grain storage

    • Land purchase (in some circumstances)

    • Water infrastructure

    • Refinancing

  • The loan term is 10 years structured as follows:

    • Two years interest free

    • Three years interest only

    • Five years principal and interest

    • The loan balance at the end of the 10 years must be refinanced with a financial institution

    • Principal and interest payments over the last 5 years are calculated on a maximum loan term of 15 years

    • Additional repayments can be made at any time

    • The interest rate is based on the Australian Government 10 year bond rate which would be below commercial lending rates

    • The current indicative interest rate is 3.11% pa

    • Initially the loan can be drawn down in up to 3 stages but must be fully drawn within the first 6 months

  • There are no pre-determined security levels. Security is required but at this stage there appears to be some flexibility around what is used for security (land, livestock, water)

  • Interest is calculated daily and paid monthly, quarterly or six monthly

Whilst these loans may seem attractive on face value, many growers are currently paying interest only on farm debt, with the flexibility to repay as much or as little as possible. 

Also, many clients have redraw facilities which minimises the cost of borrowing. For those currently paying interest only, these loans may leave the business in a worse cash position at the end of the 10 year loan term due to the principal repayments in the last 5 years.

For those with limited security it may be difficult to refinance the loan balance at the end of the 10 year term. In addition, banks may see the additional security holder as increasing the risk profile of the client, which may lead to increased lending margins.

General, Finance, Farm ManagementFred BroughtonRural Management Strategies