Directors of owner-managed construction companies are lending their businesses cash to cover cash flow. This comes as retail banks implement a more stringent and cautious criteria for lending.
The advent of this is attributed to larger contractors stalling payments to ring-fence their own cashflow, in combination with a slowdown in UK property markets and tighter scrutiny from regulators causing a knock-on effect downstream.
The Specialist Engineering Contractors Group, a trade body that represents over 60,000 UK contractors estimates that over £1 billion is retained by Britain's largest construction companies from their small and medium-sized contractors as delayed stage payments.
In order to meet their commitments to their own suppliers and to cover payrolls small construction directors recently lent their own companies over an estimated £40 million, according to reports from online finance marketplace Funding Options.
The cash crunch stems from banks taking a more cautious approach on funding given a slowdown in UK property markets and tighter scrutiny from regulators. At the present moment lenders are giving preference to larger construction companies that have multiple revenue and income streams from a wide array of projects, as opposed to minor contractors with a small quantity of current jobs and an indeterminate pipeline of future commissions.
Faced with ongoing borrowing constraints, pressure from larger contractors extending payment terms, and combined with a 'hold back' on cash payments, Directors of small companies are feeding their businesses with a continuous supply of their own cash to ensure that that they remain on the right side of solvency. The questions is, for how much longer this is sustainable.
In conclusion a slowdown is the property market will make it even more difficult for subcontractors to obtain lending from retail banks, with many lenders still smarting from their exposure to losses on construction loans stemming from the 2008 financial crisis, which saw many lenders close their loan books.
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