Lately we’ve seen many a news splash reporting the recent growth figures for the economy as a whole, but how has this translated across to the property and construction sector and what does it mean for the industry’s future?
The 2014 Funding and Finance report from MHA, a UK-wide association of independent accountants and business advisers, looks at the sector’s funding issues.
It shows that 60 per cent of respondents in the sector found it either difficult or very difficult to obtain funding, and this is in stark contrast to other sectors where the availability of finance was much better.
Traditional financing for construction
With the banks having to restructure their balance sheets, they have over recent years promoted alternative sources of finance – notably invoice financing – instead of the traditional forms of lending.
In the case of construction companies, however, this can only work within very tight procedures and requirements put in place by the lender. This often (but not always) means these types of products are not appropriate.
“We too often see that SME businesses are not on top of the cost of finance or indeed working capital control”
In some circumstances, including construction, traditional forms of lending are far more appropriate to the nature of a business.
Our survey showed that of those who were successful in obtaining funding in 2013, most of this was achieved via traditional methods of bank loans and mortgages.
However, construction businesses are having to become innovative in obtaining funding, raising the required finance from mixed sources and perhaps even more esoteric routes such as crowd funding, in order to secure the necessary working capital and to facilitate growth.
With some SMEs in construction having to agree lower contract values to secure current and pipeline work, coupled with the expectation that labour and material prices will increase in 2014, these firms are at risk of their margins being squeezed further, perhaps to perilous levels.
The initial cost of raising finance and the ongoing cost of a facility, especially with alternative sources of finance, needs to be understood and considered in the context of expected operating margins if project losses are to be avoided.
Furthermore, if funding is scarce, there may well be work that a business just cannot afford to take on if a classic overtrading scenario is to be avoided.
We too often see that SME businesses are not on top of the cost of finance or indeed working capital control but these are essential tools to have, whether they are in-house or via professional assistance.
Financial support necessary for growth
Turning to the housebuilding sector, the Labour Party recently announced its plans for increasing competition within the sector with a desire for more homes to be built by SMEs.
“Without further financial support for SMEs in the sector, the increased competition and growth demanded of the sector simply cannot happen”
However, finding funding for speculative developments and among SME housebuilders generally continues to be challenging, unless they have a good relationship with a lender and can provide a strong track record.
Without further financial support for SMEs in the sector, the increased competition and growth demanded of the sector simply cannot happen.
Despite recent good news on growth in the overall economy, the setor did decline by 0.3 per cent in the final quarter of 2013.
This is arguably a direct consequence of the difficulties the industry experiences in obtaining suitable funding. This statistic should be a wake-up call to demonstrate that the sector urgently requires help with the availability of funding.
The full version of MHA’s 2014 Funding and Finance Report is available here.
Robert Dowling is head of the MHA property and construction sector and a partner at MHA member firm Carpenter Box