What does alternative finance mean for construction companies?

POSTED: 24th June 2015
IN: Guides

With a rising number of construction firms struggling to pass the lending criteria of finance providers, alternative finance options are imperative for these SMEs.

undefinedOver the last year, UK construction companies have experienced a 45 per cent increase in financial ‘distress’, according to corporate rescue and recovery practice Begbies Traynor.

The firm’s recent survey found that more than 20,000 construction businesses suffered ‘significant’ financial distress this year compared with 14,337 in 2013-14. And mirroring most sectors, the smallest companies were the most likely to report difficulties, with SMEs accounting for 97 per cent of the sector’s struggling businesses.

Employing more than two million people and contributing more than £90bn to the economy, the construction sector is one of Britain’s flagship industries. But with a rising number of firms struggling to pass the lending criteria imposed by traditional finance providers, it’s clear that more options are imperative for this important group of businesses.

The cash flow challenge

The construction industry is characterised by lengthy, labour-intensive projects often involving many subcontractors and suppliers. It should be no surprise then, that many businesses within it are prone to cash flow difficulties. 

Though advances mean that contracting is cash-generating, often funds needs to be paid out of the business to pay the supply chain for existing contracts.

Speculating on the borrowing position of these companies, Julie Palmer, partner and property expert at Begbies Traynor, said:

“The construction sector has always proved difficult to lend to as many elements of their contracts are complex, subject to dispute and suffer from lengthy payment terms, making them high risk investments for the cautious banks who had their fingers burnt during the last financial crisis.”

More support required

But with the construction sector playing a key role in both the welfare of the economy and current demand for housing in the UK, the need to support these enterprises is keenly felt. Speaking to finance publication Mindful Money, corporate finance broker Matthew Fell, warned:

“It’s encouraging that demand for credit among the UK’s medium-sized firms is going up and costs are coming down, but credit conditions remain more of a challenge for small firms and signs of weakening demand are concerning.

“To maintain momentum in the recovery, the government should continue to do more to increase appetite for funding, including boosting alternative finance sources.”

Specialist construction finance

In recent years, alternative finance options have become more available to SMEs, with some specialist lenders developing finance solutions tailored to construction companies.

Many of these finance options offer contractors cash advances against their outstanding invoices, giving them more control over the balance sheet. Often, the service includes confidential credit control and sales ledger management services too, cutting down on the hours spent chasing payment.

Aldermore Bank is one such lender. The Bank understands the need to retain a healthy level of working capital and the specific challenges faced by construction professionals in doing so. Get in touch to learn more about the construction finance options available with us.

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