A new Payment Charter from the Construction Leadership Council (CLC), designed to improve payment practices, will also increase the appetite of lenders to lend to construction businesses, according to a leading industry expert.
Chirag Shah, Chief Executive of Nucleus Commercial Finance, says that a defined payment term of 30 days will encourage both the ‘traditional' and ‘alternative' lending community to look again at an industry that has been starved of cash in recent years, despite a rising demand.
"Construction has been ignored by many lenders for being too high risk," he explains. "Whereas some specialist lenders like Nucleus have dedicated finance products for the construction industry, the majority have opted to target other sectors with less risk.
"By bringing greater certainty to payment terms, however, I believe that those lenders may now be tempted back, which is good news for the lending community, but even better news for construction firms who will now have greater access to funding and greater choice."
Research from Nucleus to the end of March 2014 shows a clear demand for funding throughout the supply chain. More than 60% of deals referred to the firm over the last 12 months have been construction related, of which 27% were ‘pure' construction (ie scaffolders, groundworks providers, plasterers, brick makers etc), 15% were environmental services businesses, and 10% M&E contractors.
The Construction Supply Chain Payment Charter sets out 11 ‘Fair Payment Commitments, including a commitment to reduce payment terms to a supply chain to 30 days from January 2018. Progress will be staged with a target of 45 days from June 2015, and 60 days with immediate effect. Other commitments include not withholding cash retentions and making payments electronically.
"The Charter is great news for the supply chain," Chirag continues, "but it relies on those larger contractors to abide not only by the letter but also to the spirit of the proposal. Our experience certainly suggests that such support is not yet universal, but the Charter is a step in the right direction with potentially far-reaching consequences."
