Farm diversification finance: funding new farm income

What farm diversification finance is

Farm diversification finance funds non-farming enterprises on a farm. It can support letting converted buildings, solar arrays, holiday lets or farm shops, among other activities that use farm assets, land or buildings. The finance is separate from core agricultural borrowing in purpose, although it may sit within the same farm business. Defra figures show that 72% of farm businesses in England had a diversified activity in 2024/25, earning an average of £31,100 a year from it. That prevalence indicates diversification is a common part of farm business planning rather than a marginal activity. The definition covers capital expenditure for conversion, equipment and infrastructure, as well as working capital for a new or expanding enterprise. The funded activity remains non-farming, even where it uses farm premises, farm land or existing farm utilities. A diversification project can involve one activity or several, and the finance structure can reflect the asset base, the income profile and the stage of the project. It does not replace core farm finance, and lenders may treat the diversified enterprise as a separate trading activity for assessment, with its own cash flow and risks.

Providers of farm diversification finance can include high street banks, agricultural and rural lenders, asset finance companies and grant funding bodies. A loan may fund conversion work, equipment or working capital. A mortgage or secured loan may be used where the project involves land or buildings. Asset finance can cover vehicles, plant or renewable energy equipment. Grant funding may support eligible capital costs, although grant availability and conditions vary. Lenders commonly consider the enterprise type, the security available and the farm's existing financial position. The finance package can combine commercial borrowing with grant support, or it can rely on one route. The structure may depend on whether the diversified activity is letting, tourism, retail, renewable energy or another non-farming use. Lenders may also distinguish between projects that use existing buildings and those that require new construction. The type of finance can affect the term, security and repayment profile, but the appropriate route depends on the facts of the project and the lender's criteria. Some lenders specialise in rural businesses, while others assess diversification within a broader commercial lending framework with agricultural knowledge.

How much diversification earns

Defra figures show that 72% of farm businesses in England had a diversified activity in 2024/25, up about 10 points since 2015/16. The average diversified income was £31,100 per diversified farm. Letting out buildings was reported by 50% of farms, with an average of £27,900. Solar arrays were reported by 27% of farms. These figures describe participation and average earnings across the surveyed farm population. They do not indicate that every diversified enterprise earns the same amount or that every farm has the same mix of activities. The figures are averages, so individual results can be higher or lower. The prevalence of letting and solar shows that property and energy uses are common forms of diversification. The data also shows that diversification is widespread enough to be relevant to finance planning. The averages provide a reference point for understanding the scale of diversified income, but they are not a forecast for a particular project. Actual income depends on the enterprise, location, costs and demand. The reported income figures do not show the capital cost of the activity or the finance needed to establish it.

For 26% of diversified farms, diversification made up at least half of farm business income. That share indicates that diversified activity can be material to the overall farm business, not merely supplementary. The figure also shows that reliance on diversification varies widely across farms. A farm with a small letting or solar project may have a different income profile from one where diversification provides the majority of business income. The average of £31,100 per diversified farm is an aggregate measure and does not show the range of outcomes. The 50% participation rate for letting out buildings and the 27% rate for solar arrays show that these activities are common, but participation does not establish profitability for an individual business. The 26% reliance figure is relevant to lenders because it affects how much of the farm's income depends on non-farming activity. A high reliance share can change the assessment of business risk and the sensitivity of cash flow to demand, costs or regulatory change. The figures are descriptive and do not prescribe a finance structure. They show observed patterns at the survey level.

Funding routes by enterprise type

Funding routes for diversification can be matched to the enterprise type. Letting converted buildings may involve a mortgage or secured loan where the project requires building work or the purchase of property. Solar arrays may involve asset finance for equipment, subject to the lender's criteria and the project's structure. Holiday lets may involve commercial borrowing for conversion, furnishing and working capital. A farm shop may involve a business loan, asset finance for equipment and working capital for stock. Grant funding may be available for eligible capital costs, but grant schemes, eligibility and conditions vary. A single project can use more than one route. For example, a conversion for letting may combine a secured loan with grant support, while a solar installation may combine asset finance with a commercial loan. The route depends on the asset being financed, the security available and the income profile of the enterprise. The finance structure can also reflect whether the activity uses existing buildings or requires new construction. It can also reflect the term over which the enterprise is expected to generate income and the lender's appetite for the sector.

Loans can provide flexible funding for conversion, equipment or working capital. Mortgages and secured loans can be used where land or buildings provide security. Asset finance can fund specific equipment, vehicles or renewable energy plant, with the asset serving as security in many cases. Grants can reduce the capital required for eligible costs, although grant funding is not a substitute for commercial finance where the project requires additional working capital. The mix of routes can affect the term, repayment profile and security package. A lender may assess the enterprise separately from the core farm business, particularly where the diversified activity has its own sales, costs and customer base. The presence of grant funding can also affect the finance requirement and the evidence needed at application. The route is not determined by the label of the enterprise alone. It depends on the assets used, the income to be generated and the security offered. Lenders may consider whether the project can service debt from diversified income and whether the core farm business provides additional support. They may also consider the sector's demand and the experience of the borrower.

Solar and renewable energy projects

Solar arrays are one form of farm diversification finance. Defra figures show that 27% of farms reported solar arrays. The activity can involve rooftop panels, ground mounted arrays or other renewable energy installations. Asset finance can fund equipment such as panels, inverters, mounting structures and associated plant, subject to the lender's criteria. A commercial loan or secured loan may also be used where the project requires construction, grid connection works or land rights. The finance route can depend on whether the equipment is movable, whether the project is owned or leased, and whether the farm property provides security. Solar projects can have a long asset life and an income profile that differs from core farming. Lenders may assess the technology, the installation contract, the expected generation and the offtake arrangements. The 27% participation figure shows that solar is a common diversified activity, but it does not show the scale, cost or profitability of an individual installation. A separate asset finance guide can provide further detail on equipment funding. It can also explain how lenders view equipment security, term and residual value.

Grid connection and planning are material considerations for solar projects. A project may need planning permission, grid connection approval and land rights before finance can be completed. These consents can affect the timetable and the cost of the project. Lenders may require evidence that the necessary permissions are in place or that the conditions are understood. The grid connection process can involve an application, a connection offer and works to the local network. Planning permission can involve permitted development rules or a full application, depending on the proposal. Business rates and VAT can also change when a farm diversifies, so the financial projections may need to reflect those effects. Asset finance can be structured around the equipment, but the lender may still consider the site, the installation and the offtake arrangements. The 27% solar participation figure is a measure of activity, not a guarantee of consent or grid capacity. Finance for solar therefore depends on both the equipment and the project's regulatory position. It also depends on the terms of any lease or land agreement and the evidence provided to the lender.

Planning, rates and tax changes

Planning permission, business rates and VAT can change when a farm diversifies. A diversification project may require planning permission, and permitted development rights may or may not apply. The position depends on the type of activity, the building or land used, and the local planning authority's view. Business rates can also change where a building or land is used for a non-farming enterprise. The rating treatment may differ between letting, retail, tourism and renewable energy uses. These regulatory and tax effects can alter the project's costs and income, so they are relevant to finance planning. A lender may ask for evidence that planning consent is in place or that the position has been checked. The finance application can include the projected costs of compliance, rates and any necessary works. The facts of the project determine the treatment, and the rules can differ between England and other parts of the UK. The finance structure can reflect the timing of consent, the cost of works and the point at which the enterprise starts trading. It can also reflect the rates liability once the use begins.

VAT treatment can change when a farm diversifies. The option to tax can affect VAT on property lettings and other supplies. Inheritance tax relief considerations can also arise where farm assets are used for non-farming activity. The treatment depends on the facts, including the use of the land or buildings and the structure of the business. These issues can affect cash flow and the long term position of the farm business. A lender may consider whether the project has taken tax and regulatory advice, but the lender does not determine the tax treatment. The finance proposal can set out the expected VAT position, the rates liability and any relief assumptions. It can also identify the timing of tax payments and the effect on working capital. The rules are not uniform across all diversification activities. The financial projections can distinguish between farming and non-farming income and show the assumptions used. The treatment of inheritance tax relief is fact specific and can depend on the use of the assets and the business structure. It can also depend on the terms of any tenancy or lease.

What lenders assess

Lenders assess farm diversification finance by reviewing the business plan, the existing farm income and the security available. The business plan can set out the enterprise, the market, the costs and the expected income. Existing farm income can show whether the core business can support the diversification during its development. Security may include land, buildings or equipment, depending on the finance route. Lenders may also consider the borrower's experience in the proposed activity. Experience in tourism, retail, letting or renewable energy can be relevant where the enterprise differs from core farming. Cash flow projections can show whether the diversified activity can service debt from its own income. The projections can include seasonality, start up costs and the time needed to reach stabilised trading. Lenders may test the projections against the Defra averages, although those averages are descriptive and not a forecast for an individual project. The assessment can also consider the 26% of diversified farms where diversification made up at least half of farm business income, because that figure shows reliance can be material. It can also consider the mix of activities and the duration of income contracts.

A lender may require evidence for the business plan and the cash flow projections. That evidence can include planning consent, quotes for works, supplier contracts, tenancy agreements and details of existing farm borrowing. The lender may review the farm's accounts, the asset base and the level of existing debt. The security position can affect the finance terms, but the terms are not set by a single factor. The lender may consider the enterprise's dependence on seasonal demand, its customer base and its exposure to regulatory change. The 72% participation figure and the £31,100 average diversified income provide context for the sector, but they do not replace project specific evidence. The 50% letting figure and the 27% solar figure show common activity types, not the suitability of a particular project. A lender may also consider the farmer's management capacity and the labour required for the diversified enterprise. The assessment is likely to focus on whether the project can repay finance from its own cash flow and whether the core farm business provides a cushion. It can also consider the timing of income against the repayment schedule.

Risks and timing

Farm diversification finance carries risks that differ from core agricultural borrowing. Planning delays can postpone the start of trading and increase the cost of the project. Demand risk can affect letting, tourism, retail and renewable energy enterprises in different ways. Seasonality can create uneven cash flow for holiday lets, farm shops and some leisure activities. Reliance on diversified income can also be a risk where the activity makes up a large share of farm business income. Defra figures show that for 26% of diversified farms, diversification made up at least half of farm business income. That reliance can make the farm business more sensitive to changes in demand, costs or regulation. The risk is not limited to the diversified enterprise, because the farm business may use core income to support the project during development. The 72% participation figure shows that diversification is widespread, but participation does not remove the risks of a particular project. The finance structure can reflect the timing of income and the size of the project. It can also reflect the availability of contingency funding and the lender's view of the sector.

Timing is a central issue in diversification finance. A conversion, grid connection or planning application can take time, and the enterprise may not generate income immediately. Finance costs can start before the activity reaches stabilised trading. A cash flow projection can show the development period, the drawdown of finance and the point at which income begins. The lender may require contingency arrangements for delays or cost overruns. Demand can also change between the planning stage and the start of trading. Seasonality can affect the first year of income and the ability to service debt. For projects where diversification makes up at least half of farm business income, a delay or weak trading period can have a material effect on the whole farm business. The 26% reliance figure shows that this situation is not uncommon. The finance structure can include a repayment profile that reflects the expected income pattern, but the terms depend on the lender's assessment and the security available. A longer development period can increase the total finance requirement and the need for working capital. It can also affect the timing of grant claims.

Frequently asked questions

How many farms diversify?

Defra reports 72% of farm businesses in England had diversified activity in 2024/25.

What is the most common diversification?

Letting out buildings, undertaken by 50% of farms, with average income of £27,900.

How much does diversification earn on average?

£31,100 a year per diversified farm in 2024/25, according to Defra.

Does diversification need planning permission?

Often yes, though some changes of use fall under permitted development rights.

Can diversification affect business rates?

Yes, non-agricultural uses can bring buildings into business rates.