With costs continuing to rise and lending fluctuating wildly between sectors, many firms are turning to different funding approaches to get their projects off the ground.
A lack of access to finance has long been one of the industry’s biggest stumbling blocks.
Financial constraints come up repeatedly in industry surveys as one of contractors’ biggest barriers to growth, even ahead of factors such as the planning process and skills shortages.
Even now, when the market is broadly on an upwards curve and workloads are largely increasing, bank lending to the construction industry is still inconsistent and SMEs and subcontractors are continuing to feel the pinch.
Rising cost pressure
Financial constraints were reported as the most significant barrier to growth in RICS’ construction market survey for Q4 2016, with 69 per cent of respondents citing it ahead of planning delays (53 per cent).
Other surveys for Q4, including those from the Construction Products Association and Build UK, point to concerns from contractors on rising costs, while the most recent Markit/CIPS Construction PMI for March confirmed that costs were still at their highest point since the recession– pressurising contractor margins.
“SMEs in construction need to be confident they will be able to pay their subcontractors on time”
Carl D’Ammassa, Aldermore
The figures portray an industry that remains under significant financial strain. Following last June’s referendum, Mace CEO Mark Reynolds told Construction News that changes to banks’ loan-to-cost ratios– which essentially show banks how much risk they are taking on as part of a loan – had caused a slowdown in the number of development projects coming forward.
His view is supported by data from the British Banking Association, which shows bank lending to developers continuing on a downward curve. The figures show lending to developers fell by an average monthly rate of £72.8m in the 12 months between January 2016 and January 2017, with lending only increasing in May and July.
It is a similar story in the commercial sector, where bank lending declined by an average of £24.3m a month over the same period.
Housing vs developers
In contrast, two other sectors have fared much better in terms of lending: for housebuilders, lending increased by an average of £62.4m a month from January 2016 to January 2017, while civil engineering contractors saw an average increase of £50.2m a month over the same period.
The evidence suggests that for developers, banks are shying away from riskier projects and are more willing to back safer jobs in both the housebuilding and infrastructure sectors.
Similarly, statistics from the Bank of England show that lending saw a significant slowdown in the months following June’s EU referendum, with the data covering loans to firms with a turnover of more than £25m. Lending peaked at £1.14bn in July, but slumped by 23.4 per cent in August to hit £877m before falling a further 14 per cent in September to £754m.
However, since this trough, there is evidence that the situation has improved, with lending hitting a 12-month high in January of £1.33bn – an increase of more than 77 per cent from its low point in September.
But while larger contractors may be starting to see more lending coming through, the picture changes for subcontractors and SMEs.
For SMEs, a lack of finance has been one of the primary barriers to growth, according to research from specialist bank Aldermore.
The research, conducted during February this year and covering more than 1,000 SMEs, found that 25 per cent of small and medium-sized construction businesses had missed out on a new business opportunity due to lack of finance in the previous 12 months. According to the research, this costs the firms an average of £74,000 a year.
However, Aldermore group managing director of business finance Carl D’Ammassa says the results did not come as a great surprise due to SMEs’ long-standing struggle to access working capital finance.
“There are specialist construction finance providers available with a greater appetite to support firms”
Helen Wheeler, Bibby
“To seize new business opportunities, SMEs in construction need to be confident when taking on new contracts that they will be able to pay their subcontractors on time,” he says.
He says that for SMEs to make sure their subcontractors aren’t kept waiting for payment, many firms need to find a financial bridge between the point they carry out work and the point it is paid for.
Lending finance graphic_Aldermore and BBA
Source: Aldermore and BBA
“This ensures that they receive payment at the earliest opportunity and subcontractors are not left waiting,” he says. “It’s also where external working capital finance can prove invaluable and enable small businesses to accept opportunities they would otherwise have to turn down.”
Alternatives for subcontractors
And for subcontractors, the story is very much the same, according to Bibby Financial Services managing director of construction finance Helen Wheeler. She cites a Bibby survey of 250 subcontractors in which only 23 per cent said they had ‘excellent’ cashflow, with a further 20 per cent reporting cashflow and access to finance as one of the biggest threat to their business over the course of 2017.
“Many subcontractors have limited cashflow, and need the right type of funding that can help them to get going on projects and offset these significant costs,” she says.
Most still rely on the banks, however, for their funding solutions, with 37 per cent of respondents to the Bibby survey using bank overdrafts to get access to finance. In contrast, only 10 per cent of subcontractors used alternative finance platforms, which Ms Wheeler describes as a real opportunity for construction.
“While banks have traditionally been the first port of call, there are specialist construction finance providers available with a greater appetite to support firms,” she says.
However, not all developers and SMEs are struggling to secure funding. Earlier this month, developer and contractor McGoff Group secured a £39.9m deal with peer-to-peer lending firm Wellesley Finance to back its £75m Downtown PRS scheme in Manchester, which the firms described as the largest ever debt package issued by the lender.
It proves that some lenders, particularly non-traditional ones, are still willing to back ambitious projects.
But whatever the source of finance smaller firms are still finding themselves at the sharp end of cost increases and tight margins.
And with costs still running at an eight-year high last month, the temptation to use alternative lenders to get projects going and keep cash flowing is on the rise.