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Cash crisis: Small firms' battle with trade debt continues...

Each construction SME was burdened with an average trade debt of £484,000 during the last financial year, suggesting that despite the economic upturn, the strain on the sector’s smallest firms remains severe.

By unearthing SME trade debt levels from official Companies House records, we have helped illuminate the extent of the cashflow crisis that is unfortunately still affecting the sector.

Research into account records submitted by 550 SME contractors reveals that firms with a 10 to 49-strong workforce and turnover between £2m and £10m are the worst hit, with each on average £627,000 in debt – accounting for 16 per cent of turnover.

Burdens of debt

Not all of this debt is down to late payment, but with the data showing an average time for payment in 2013/14 of a lengthy 44 days, it is certainly a major contributory factor.

“There is much to be done to encourage construction project activity to cascade down to the industry’s smaller builder backbone”

Despite of course late payment not being confined to just the construction sector, it was only last year described as “endemic” by R3, the trade body for insolvency professionals, and it appears this is still the case.

Our findings also reveal firms with between one and nine employees and a turnover less than £2m each have an average trade debt of £41,000, accounting for 14 per cent of turnover.

At Debt Guard, we believe it is these micro-firms that require greatest support from the bigger contractors to boost their cashflow and stave off the dangers of closure.

Work to do

Accordingly, there is much to be done to encourage construction project activity to cascade down to the industry’s smaller builder backbone, with big business contracts still tending to be the preserve of the big contractors.

“Best practice measures and voluntary codes can only achieve so much and only skirt around resolving the issue”

At the larger end of the SME scale, the study reveals medium-sized companies with 50 to 249 employees and a turnover between £10m and £100m, as expected, have the highest levels of trade debt at £969,000 – accounting for 13 per cent of turnover.

Yet it is these more established companies that suffer less from the impact of late payment, due to considerably higher cash reserves and the ability to set more favourable payment terms.

Take action now

To reverse the late payment culture, we believe more affirmative, regulatory action is required.

Introducing fines to contractors that exceed contractual payment terms should be considered, as should a mandatory maximum timeframe of 60 days for payment before penalty charges are incurred.

After all, best practice measures and voluntary codes can only achieve so much and only skirt around resolving the issue.

One final message we would give to all contractors suffering from late payment is, ‘Don’t write off your debt’.

Where it is deemed necessary, legal action to professionally recover it is proven to work and can help strengthen credit control processes.

Mark Burgess is chief operations officer at Debt Guard Solicitors

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