Despite being hardest hit by the recession, the construction sector has suffered from a complete lack of financial support. By Gary White
As specialists in corporate finance, we work with several construction firms who have survived the downturn only to face a new challenge: recovery.
Most need funding; either their cash reserves are starting to be depleted after such a long period of inactivity, or they are in a position to expand but need support.
But despite Government pledges of support, money has not been made available to the sector and continues to be withheld.
This does not mean firms can’t access the funds, just that they need to know what’s available and how to apply.
While private investment has remained the lynch pin of large companies, the primary funding vehicle for SMEs was supposed to be the Enterprise Finance Guarantee Scheme, or EFG.
Launched by the Department for Business Innovation and Skills in January 2009, it offers £1.3bn through unsecured loans of between £1,000 and £1m to viable businesses at the banks’ discretion.
The only problem is that while local bank managers have generally been sympathetic to sound applications, we’ve found that the banks’ central credit departments have unofficially labelled certain industries as high risk and therefore are reluctant to lend to them – including construction.
As a result, most construction firms aren’t informed of the scheme and are steered towards secured lending which, considering the lack of equity in property, isn’t a valid option.
According to Government figures, 458 construction companies were granted EFG loans by August, or 0.2 per cent of the sector.
In light of the current market, it seems incredible that so few applied. There has been speculation that fear of losing existing credit facilities has been at fault, as well as a general lack of awareness.
The Government has invited feedback on the scheme by October, but again this is happening quietly and there has been no commitment to publish the results before the scheme ends in March 2010.
However, it’s not all doom and gloom. Investors want to see a track record of profitability, realistic forecasts, talented and committed staff, a strong management team, market intelligence, competitor benchmarking, growth potential, sustainable profit and above all: minimum risk. This might seem an impossible wish list, but it’s our core business.
Also, this might sound strange coming from an accountant but it’s important to be creative when sourcing funding, using different strategies in tandem to suit a business, such as: financing a debtor book and stock ledger, asset or trade finance; entering into hire purchase arrangements; selling shares to managers or key employees; seeking an external investor; restructuring or maximising tax efficiencies to create a cashflow advantage.
Once a firm knows what’s achievable and who to speak to, they can obtain the capital they need to meet their business objectives – however unlikely it might seem now.
The key to funding is having access to a good network of contacts, being prepared to negotiate with the banks or even switch provider, and understanding what investors want to see.
Gary White is a corporate finance partner at CBHC chartered accountants