Cashflow impacts SMEs in all areas of business, but certain sectors - notably construction - have struggled more than others to find the funding they need to prosper and grow.

Part of the reason has been the parlous state of the industry, but with the change in fortunes now being reported (infrastructure construction work is predicted to increase by 5.2% in 2015 on the back of a 3.4% rise last year), what options for finance are available?

The central issue with funding construction sector businesses is in understanding how the industry works, how it is funded and gets paid; a lack of understanding has made ‘traditional' lenders unwilling to commit funds. This issue has been further compounded by challenges around late payment; a parliamentary inquiry last year found that businesses employing construction companies were some of the ‘worst offenders' in terms of late payments.

A recent survey of SME construction firms employing up to 250 staff, revealed an estimated £2bn is being written off as bad debt each year. The survey also found that 70% write off an average of more than £10,000 each year. Almost 60% of firms said they do not always receive the amount they have invoiced for, but are forced to accept lower settlements because they cannot afford or wait for dispute resolution or court rulings.

Typically construction firms rely on risky and expensive overdrafts or loans to bridge the funding gap while they wait to get paid. But another alternative is invoice finance, which at its simplest is a product that advances a company a percentage of an invoice that it has yet to be paid for. If a construction company needs an immediate injection of cash, then invoice financing gives fast access without red tape. Supplies, wages and overheads can be immediately paid, and, regardless of the payment terms, the business is not dependent on the customer paying him before he can pay his own partners within the supply chain.

Invoice finance is perhaps not always enough, which is why hybrid solutions are being developed. One, for example, developed in association with a team of quantity surveyors, provides pre-payments against applications, stage payments and milestones for sub-contractors. It combines a ‘traditional' factoring model with a fixed fee to ensure transparency on cost, and advances cash at an agreed percentage of the outstanding invoice/application value, taking into account construction's typically longer contracts.

Such products are finding a willing audience from every spectrum of the construction sector, including those specialising in environmental services, refurbishment and M&E projects.

And other new products are also being developed, including an early payment scheme for medium-sized contractors with a turnover of over £20 million, enabling early payments to their own sub-contractors, thus ‘protecting' the critical supply chain.  

The construction industry is highly complex and varied. Projects can range from large-scale national activity, such as the London 2012 Olympic Games, to building a house. Whatever the scale of a project, sub-contractors need to be paid on time. Until traditional lenders fully understand the industry and support it, there will always be a need for alternative finance. 

For more information: www.nucleuscommercialfinance.com