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Factoring & Invoice Discounting

Construction businesses turn to invoice financing to plug bank lending gap

By CreditMan Monday, January 14, 2013

The number of construction companies using invoice financing has jumped by 17% in the last year, from 1,629 in 2011 to 1,911 in 2012, following a decline in traditional bank lending, says Wilkins Kennedy LLP, the Top-20 accountancy firm.

Invoice financing allows businesses to borrow against unpaid invoices. This allows a business to recoup a significant proportion of the value of an invoice much faster – often on the same day as delivering the goods or service – than the typical 60 or 90 day invoice timeframe.

Wilkins Kennedy says that bank lending to construction businesses fell 17% in the two years to the end of July 2012, to £20bn.

Nick Parrett, Head of Property & Construction at Wilkins Kennedy, says: “The construction industry has been badly hurt by the reluctance of banks to lend to even the most solvent businesses in this sector. New finance is the lifeblood of any business and, without bank lending, construction firms are having to pursue alternative options.”

“The clients of construction companies can be notoriously slow to pay their bills, so most construction companies need external financing when they start new projects.”

Nick Parrett adds: “In the absence of bank lending, alternatives such as invoice financing can be a quick, simple way of improving a business’ cash flow.”

Wilkins Kennedy says that invoice financing is available through some banks as well as specialist providers or introducers, such as cash-flow.co.uk.

Over the past five years, the number of construction companies using invoice financing has grown by 65% from 1,160 in 2007 to 1,911 in 2012.

Wilkins Kennedy adds that while many businesses have struggled to access traditional bank financing, the construction sector has experienced particular difficulty.

Nick Parrett explains: “It’s no secret that banks have had bad experiences with some construction firms in the past, so now the whole sector is seen as a high risk. Tarring the whole sector with the same brush is unfair though, and it puts at risk the financial health of a sector that’s a major contributor to the UK economy and a major employer too.”

“Many construction companies are very low risk, but they don’t get a look in when it comes to bank lending thanks to failings of others. Banks need to be as objective as possible, and make lending decisions on a case by case basis.”

Nick Parrett adds: “The lack of bank lending has been compounded by the lack of successful government lending schemes.”

Recent Wilkins Kennedy research found that in the second quarter of 2012, the construction sector received just 4% all loans made under the government’s Enterprise Finance Guarantee (EFG) scheme.

Between 2008 and 2012, the construction sector received just 8% of all EFG loans. By comparison, the wholesale and retail sector received 28% of all EFG loans.

Other Wilkins Kennedy research has found that insolvencies in the construction sector increased from 1,547 in the final three months of 2011 to 1,570 in the first three months of 2012.