Andrew Dixon, commercial director – specialist finance at Aldermore, examines the alternatives to High Street lending to help construction companies keep building
The UK construction sector is one of the pillars of the UK economy, representing around 6% of our national GDP. It supports the livelihoods of over 2.5m construction workers spread across thousands of construction companies and subcontractors.
Quite simply, the nation’s construction firms are contributing to the growth of our economy. They are fundamental to one of the government’s key aims – to build more new housing. With a government target of 300,000 new homes a year by the mid-2020s, the long-term prospects of the sector are solid, whatever wider economic uncertainties surround the country.
Supply chain and financing challenges
Despite the solid foundations the industry rests on, there are pressures and challenges that every company has to deal with almost as a matter of course.
As Peter Vinden, CEO of industry specialist the Vinden Partnership, says: “The industry had a shock at the beginning of 2018 with the collapse of Carillion, an event which sent out ripples across the entire industry supply chain. Many major contractors suffered runs on their cash and these organisations have responded by attempting to extend payment terms. Consequently, smaller companies have become cash-stretched, despite volumes of work holding up reasonably well.
“At the same time, many SME contractors and subcontractors are finding it harder to secure financing from High Street banks. The banks have become nervous of construction following Carillion’s demise. Recently, we have seen several pieces of bad news involving Interserve finances, while construction giant Kier launched a £264m rights issue to shore up its balance sheet.
“The banks’ nervousness is compounded by the fact that they are having to meet stress tests required by the EU and the Bank of England. The reality is that the clearing banks are ‘cash piling’ in order to build cash buffers and are increasingly reluctant to lend into the construction sector.”
Cash flow pressures
The reality is that, for most building companies, there is always pressure around cash. This can be exacerbated if a main contractor decides to delay payment. When you have workers to pay weekly or monthly, but won’t receive payment for 30-60 days or more from the main contractor, there is an obvious gap to be bridged. Materials suppliers often provide only limited credit, adding to the squeeze.
These difficulties can be made more acute by the seasonality of the building trade: winter can be a challenging time. There are shorter hours on site and work can be interrupted by bad weather. There is the added pressure of tax bills due in January, VAT returns and the larger PLCs wanting to conserve their own cash resources. Sometimes it can feel like a perfect storm.
This is why it is essential for companies to get access to cash and keep working capital available. But according to the National Federation of Builders, construction SMEs are owed £30bn in unpaid invoices – the industry has the worst payment record of any industrial sector.
Flexible financing options – Construction Finance
To add to the challenges, many building companies look no further than their High Street bank for financing, usually in the form of an overdraft or a loan. Industry studies such as the BDRC SME Finance Monitor have shown that construction firms suffer from amongst the highest rejection rates of any sector-leading companies to often stop looking further for alternative financing, regarding that as the end of the matter. But there are many more options available from specialist and asset-based lenders such as Aldermore.
At Aldermore, we are committed to supporting UK construction companies and have developed a bespoke suite of financing products aimed specifically at SMEs.
One of the products that we provide is Construction Finance. This gives fast access to working capital by providing companies with up to 70% of the value of their uncertified billing as soon as they have issued it. Funding is usually advanced within 24 hours – meaning that companies can pay staff and meet other costs without having to wait for the main contractor to pay them.
It’s quick, simple, flexible and transparent. It gives companies the confidence to meet their outgoings even if there are delays in payment from the main contractor. It also means subcontractors can confidently take on larger contracts that they might otherwise have stayed away from, allowing them to grow their business.
A service not just a product
At Aldermore, we pride ourselves on offering a great service. We have a dedicated Construction Finance team, who have detailed knowledge of the sector and work closely with clients. By getting to really know their businesses, we can make decisions based on a company’s individual plans and circumstances.
Through our Relationship Managers, we advise and work alongside our clients, and can also introduce them to helpful consultants such as The Vinden Partnership.
It’s about providing tailored funding to businesses in the sector, supported by a team of people who really understand the marketplace and its cash flow dynamics.
Alongside Invoice Finance, we also offer bad debt protection, which safeguards companies against potential losses that may be incurred if customers can’t or won’t pay their debt. In difficult situations, such as Carillion, we look to support our clients by highlighting potential situations early and helping them to look for solutions to reduce the risk caused to their business.
To see the ways we can help, including a useful guide to help navigate the financial challenges, visit www.aldermore.co.uk/constructionfinance.
Vital support to the sector
There is so much out there that companies can take advantage of, far beyond the traditional bank overdraft facility or loan.
This is something that Peter Vinden echoes: “If it wasn’t for the challenger banks, I am sure we could have seen a contraction in the construction sector. Access to funding is as important to the sector as the supply of materials and labour. Without funding, there simply can be no building.”
Construction is a hugely important sector with a strong future ahead of it – we are committed to providing the lifeblood of financing that companies need to keep their businesses building.
Tel: 0333 999 3378
*Please note: this is a commercial profile.