The collapse of Carillion sent shockwaves throughout the whole economy, not just the construction industry.
The issue was discussed and debated everywhere from the houses of parliament to the local pub. There was public outrage when people learned that Carillion had effectively boosted its own cash flow by dragging its feet when it came to paying suppliers. They commonly had to agree to up to 120-day payment terms in order to win contracts.
To those of us who are involved in the industry, whether that be as a sub-contractor, financier or anything else – it came as no surprise.
There is certainly an increased level of scrutiny on the subject, with newspapers recently reporting that large companies could soon have to nominate a ‘late payments director’ whose role will be to make sure invoices are paid in a timely fashion. This is all well and good, but what can you do to protect your business in the short term?
Construction finance is a form of invoice finance.
In simple terms, it advances the cash which is tied up in unpaid invoices; so, rather than waiting 90 days to receive payment, you could receive a percentage of the total value within 24 hours. When your customer makes payment, the remaining balance will be made available to you.
As a sub-contractor, you might be thinking ‘that all sounds great, but we don’t issue invoices, we issue valuations and applications for payment’ – don’t worry, we’ve got you covered. Traditional lenders, such as high street banks, tend to shy away from construction finance as this may be viewed as high risk. This left a gap in the market which has been filled by lenders who specialise in construction finance. These specialists understand that it’s not as simple as completing a job and issuing an invoice for the full amount.
These lenders know that at certain points throughout the job, you are entitled to request payment for the work undertaken so far. Rather than wait up to 120 days to be paid, the lender will advance an amount, providing you with the funds to continue the job.
Alongside finance, these lenders also offer what’s known as Bad Debt Protection or Credit Insurance. Essentially, these products protect you against the risk of your customer going bust and not making payment.
Who Are the Lenders?
Our panel includes lenders across the commercial finance spectrum and we have one high street bank who lends in the sector. We also have relationships with several challenger banks, asset-based lenders and independent funders.
There are pros and cons to each, our expert debt advisors can help you figure out which is the best fit for your business. To their credit, all these lenders have invested in specialist construction divisions.
What Does This Mean for You?
This means that you can be confident that you’re dealing with someone who speaks your language, someone who knows their CIS from their VAT and someone who understands the challenges you face on a day-to-day basis.
In addition to having a specialist construction division, most of these lenders will work closely with a Quantity Surveyor, who will help them to provide responsible finance based on your contracts. At the due diligence stage, the Quantity Surveyor would usually review the contracts you’re working on. Understandably, certain firms would rather not share their contracts, but the QS’ aim is to spot any nasty clauses in your contract such as liquidated damages.
For example, having done this, they will recommend a sensible prepayment or advance rate to the lender. Typically, it’s somewhere between 50% and 70% of the total value of your valuations or applications for payment.
How Much Will It Cost?
The costs will vary according to your business, the lender, the perceived risk and the type of lending. It’s worth noting that there are two main options for the fee structure:
- Fixed or Bundled Fee: You will only pay a certain percentage of every valuation or AFP. This is useful if you’re new to construction finance or you just want a straightforward option where you know exactly what it will cost you.
- Service Fee: You may choose to pay a service fee (lower than the fixed fee) on every valuation or AFP, and a discount rate (like interest) on the outstanding amount you’ve borrowed. This is better suited to more sophisticated firms or those familiar with construction finance.
What Are the Next Steps?
To discuss your situation and figure out which is the best option for you, get in touch with the experts at Ping Finance. It won’t cost you a thing and you’re under no pressure to progress with any of the options we discuss. Call us on 0330 058 2330, complete our online application form or send us your details and we’ll call you at a convenient time.