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, perhaps up to 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 a number of solutions which may be able to help – from invoice finance to revolving credit facilities and overdraft alternatives.
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%. A big benefit from 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. We can help you navigate your way through it.
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.
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 it seems of late there are more months of contraction of lending than there are of growth. In short, it’s never been harder to find bank finance for your construction firm than it is right now.
Fortunately, the alternative finance market is growing in this area. We can help you find the lender your business deserves.
Financial products available for the construction industry
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.
The difficulty with bridging loans is that there are now over 40 lenders active in the market right now – how do you find the right one? That’s where we come into play – we’ll help put you in touch with lenders most appropriate for your business.
Invoice factoring and discounting
Many construction firms use invoice finance, but not all invoice finance companies work with the construction sector. We’re the UK’s leading invoice finance broker – let us put you in touch with the best provider for your firm.
Find out more about invoice factoring and invoice discounting here.
Asset finance – hire purchase and leasing
Hire purchasing and leasing can be great ways of raising the finance to buy equipment or vehicles. Have a chat with us about your options.
If you have a lot of capital tied-up in your equipment (large plant for example), it can be released by refinancing. This is similar to a secured business loan wherein your assets are used as security – read about them next.
Essentially, business loans come in two flavours – secured (usually secured against property) or unsecured loans (which typically require the directors to issue a personal guarantee).
It’s increasingly hard to get an unsecured loan for your construction business from your bank, but there are alternative lenders out there who may be able to help – our team can talk you through your options.
Overdraft replacements and revolving credit facilities
Useful cash flow management tools, overdraft replacements (often called revolving credit facilities or business advances) work just like a bank overdraft. Money is drawn down from a pre-agreed credit limit and interest is charged daily until it is paid back. Credit limits are usually based on business turn-over.
Get in touch
If you’re daunted by trying to find a lender to give you the finance you need, let Touch help and give us a call for a no-obligation chat about your business requirements and what options are out there for you. As specialised brokers, we can put you in touch with funders who will truly understand the needs of your construction business.