Financial challenges for construction firms
Managing cash flow and dealing with late payment
In a world where contracting and sub-contracting are common, construction firms are often made to wait to be paid for work completed. You may have to wait 30, 60 or even 120 days in some extreme cases. And that’s on top of having had to already pay for materials, equipment hire, and wages.
Cash flow is the lifeblood of any business but can often be hard to manage. Touch offers access to construction industry invoice finance solutions that will keep your funds flowing, on terms that are both competitive and sustainable.
Constructions firms can also benefit from an improved cash flow simply by joining the Construction Industry Scheme. Contractors will send a 20% tax deposit to HMRC instead of 30%. Another big benefit of signing up with CIS includes potential qualification for gross payment status – read our quick guide here.
Financing expensive equipment
Heavy equipment and machinery can be expensive, even if bought second-hand. Standard financing models are leasing or hire purchase and often available at the point of purchase. However, finance provided from the vendor isn’t suitable for all businesses and often isn’t available if you’re buying used equipment.
There are alternative asset finance producers around, however, who may be able to help.
Mind the gap – financing the bridge
For many construction firm owners, this is a familiar scenario: You’ve seen a great opportunity to develop a property but can’t wait the weeks (or months) it takes to organise a mortgage. If you don’t have large amounts of capital to hand, or don’t want to make a director’s loan to the business, it can be hard. Plus, the banks are unlikely to be able to help in time. Fortunately, the alternative bridging loan market is growing rapidly, so taking out this kind of agreement may be a viable option.
The availability of skilled labour
The availability of labour is one of the biggest challenges faced by the building industry. The Federation of Master Builders (FMB) points out that smaller and mid-sized construction companies suffer the most in trying to recruit carpenters, plumbers, bricklayers and electricians. This skills shortage is pushing wages up, too.
While it may seem expensive at first, putting some form of skills development plan in place makes sense. It’s estimated that 60% of employers have already started doing so.
A lack of bank lending
The banks typically have a lower and lower appetite to lend to small and medium sized construction firms. Bank of England figures show that mainstream bank lending to the sector is highly volatile but recently there are more months of contraction of lending than there are of growth. In short, it’s never been harder to find a bank funding solution for your construction firm than it is right now.
The concept of a bridging loan is easy to understand: a lender will provide you the cash required for a relatively short period of time. Although the monthly interest rate will be significantly higher than a mortgage, the loan period is much shorter and, importantly, the arrangement time is usually much shorter, meaning you can get your cash in days or weeks rather than months.
How can invoice financing help construction businesses?
Another option is to give your business a cash injection by financing outstanding invoices that are yet to be paid.
Many construction firms use invoice finance, but not all invoice finance companies work with the construction sector. However, as the UK’s leading invoice finance broker, we can put you in touch with the best provider for your firm.
Find out more about invoice factoring, invoice discounting, and spot factoring here.