The importance of finance within the construction industry cannot be understated. Not least because it is the most competitive and payment-delayed industry in the UK. Understanding how the financial challenges affect your business is just the start.
This article will provide the guidance you need to navigate the challenges associated with obtaining finance in the construction industry and 8 ways unsecured loans can help your construction business flourish.
What Is An Unsecured Business Loan?
Unsecured loans are finance which has not been secured by any collateral you have. So if you stop making your payments, the bank is not going to take your car, your house or your business property as a result.
This type of finance is approved primarily on your promise to pay the lender back - no more, no less. The lender will look at certain, significant factors which will indicate the likelihood and your ability to repay them:
- Credit: The lender will check your borrowing history to see how successfully you have paid back loans and fulfilled credit agreements in the past. From this information, they will assess your creditworthiness. In order to get a substantial unsecured loan, a borrower will need to demonstrate strong past borrowing behaviour.
- Income: All lenders like to know that borrowers have enough income coming in to repay their loans. Therefore, the most important documents to present are proof of your income, balance sheet and bank statements. Lenders will use this information to assess a borrower’s debt-to-income ratio.
The Number One Problem With Issuing Credit In The Construction Industry
Without a doubt the biggest challenge facing lenders in the construction sector is underwriting. However, most banks and lenders still lend within this sector, and, it is important that when construction companies borrow, they do so by providing clear and accurate financial information in their application.
Lenders will always favour companies that borrow to support growth through their operations and their capacity to repay, rather than by borrowing to mitigate past financial losses.
A construction company should do everything it can to present itself as financially capable. It should be watertight in its account records and business projections. This data is a critical decision-maker and potential deal-breaker for construction businesses looking to attract investment and borrow unsecured finance.
For the lender, identifying a company’s true ability to repay is the key to lending decisions. When borrowers can assure or demonstrate compliance with finance agreements, it eliminates the lender’s potential exposure to credit default.
How can Unsecured Business Loans help Overcome a Construction Company's Financial Challenges?
Construction companies who address these their financial challenges head-on will be in a stronger position to take advantage of growth than those that don’t take them seriously. There are always issues and obstacles to growth, but identifying and preparing strategies to overcome them are often the key differences between success and failure.
Below we have listed 8 unique challenges construction companies face and how alternative unsecured finance solutions can help:
Challenge #1: Limited liquid working capital
A recurring theme in construction is that “money comes in like a train and goes out like a rocket”! It is a problem that affects all construction businesses who find themselves in the fluctuating sales cycle of boom and bust. It is easy to see how businesses can get trapped in the process of increased outgoings and the costs of finishing projects at a time when sales are reducing.
This pitfall is exacerbated with the way it impacts on the available cash flow deeper and deeper into projects; when multiple projects are being undertaken and outgoings remain huge while the forecast projections can become negative as sales drop.
The increased pressure is seen in cash flow balances. Boosting your cash flow is a key survive-and-thrive mechanism used in construction, and unsecured finance, especially short-term finance, is its most useful tool.
Challenge #2: Poor profitability
The entry-level barrier to construction is low. It always has been. In a saturated marketplace with heavy competition, the ability to become profitable isn’t a short-term luxury. With multiple other companies vying for your business, the returns on completed projects have become lower and this increases the time needed to turn a profit.
The nature of this leads to longer periods of time where your company is in a position where exposure to bad debts can’t be overcome.
The amount that can be reinvested into the business is reduced when poor or shrinking profits are combined with increased overheads and material costs. Businesses often use external funding to overcome this financial trip hazard in order to realise the profit on overlapping projects.
Challenge #3: Project complexity and delays
While opportunities in construction are currently growing, so too is project complexity. Changes to building requirements can often cause unexpected additional costs, meaning construction companies can struggle to keep within expected budgets.
The increase in building projects being subject to changes is a marked one. Projects that don’t complete on time have become almost standard and it rarely results in greater profitability for the construction company. Moreover, project changes are unlikely to be adequately covered with contractual costs being increased, so it results in a higher frequency of payment withholding for missed timescales and budget failures.
Delays in payments and additional build costs aren’t always factored into estimates or aligned with the cut-throat bidding process. Additional finance is often the key to realising a profit on complex projects.
Challenge #4: Overheads and a weaker pound
The effect of Brexit and the weaker pound impacts everyone, especially those in construction. One of the primary causes for rising build cost is the import of raw materials from overseas.
Project estimates are often calculated many months in advance of breaking ground and mitigating these future price rises can become a huge burden on a construction company’s ability to operate a healthy cash flow.
Currently, material costs are at a high and this ultimately leads to businesses having to squeeze costs elsewhere, either in staffing or having to pass on certain projects entirely. Accessing finance, especially with unsecured business loans can be an effective bridge to overcoming short-term material problems and realising long-term profits on projects.
Challenge #5: Skilled staff
Simply put, there are more skilled professionals retiring from the construction industry than entering it.
Many of those within the industry have left either due to the past recession or because they are reaching retirement. Acquiring more skilled staff to get projects done comes at a cost at a time when profits are falling. This leads to increased financial pressure on construction companies.
It doesn’t help that the availability of qualified professionals such as estimators, supervisors, engineers and individuals from other skilled trades, as well as the ability to hire top-quality employees who can get projects completed on time, is at an all-time low.
Indirectly, not having the right staff managing projects leads to longer lead times and unavoidable delays to project timescales.
Challenge #6: Productivity
Productivity has been a key mantra of current governmental policy on the UK workforce, however, this won’t change unless the skills-shortage is addressed. Employing the right calibre of professionals is one thing, but so too is getting them trained.
Successive policy changes have dictated that it is up to businesses themselves to train employees, but this takes time and the results aren’t always apparent for those companies doing the training and ‘investing’ in new employees. This is even more apparent when the right supervisors are not in charge.
External funding to support training schemes is a progressive strategy for construction companies looking for a long-term foothold, but it also needs a source of funding. While perceived as risky, it can be a self-fulfilling investment in your own labour force.
Challenge #7: Sustainability concerns
The construction industry is the main consumer of raw materials, and, while some parts of the world have relaxed pollution and energy usage regulations, the UK remains committed to achieving higher levels of sustainability.
Investing in these more efficient technologies improving energy emissions and consumption, as well as using ‘greener’ materials is a bold approach in an industry unused to significant changes.
However, smart planning and sustainable design could be the key to winning contracts, but they often cost more to implement, despite having end-user benefits. Having access to external funding can help implement this approach and help your construction company stand out and win more business.
Challenge #8: Workplace stress
There’s an image of the typical construction company employee:
- they work long hours;
- eat poorly;
- and work in an environment that nearly always has timescales and financial pressures that are both at breaking point.
It’s no surprise that work-related stress is one of the leading causes of workers (at all levels) taking time off. Over 400,000 construction work days were lost in 2016. Unfortunately, for most businesses, project pressures nearly always come before employee welfare, which only increases the problem.
Not having either the time or the funding to alleviate this problem only serves to exacerbate it. Using finance to improve the conditions and practices of construction employees can often result in increased attendance with fewer lost days and improved productivity; ensuring targets are met.
Have You Explored Your Financial Options?
There’s a bigger picture. The construction industry significantly affects most other sectors of the economy too. New homes, retail parks and regeneration projects have become important drivers of the UK economy.
Raw materials, skills shortages, productivity and project timescales are not unique problems faced by construction businesses. However, they are more critical to their survival.
Considering these factors, it is unsurprising that construction businesses face cash flow problems that become more important than those of other industries. If banks are still reluctant to lend to construction companies after the excesses of the last recession then it is up to the construction industry itself to identify and capitalise on the potential financial opportunities.
Unsecured business loans represent one financial route the industry should be utilising. If you face any of the challenges outlined above or, perhaps have a problem that hasn’t been listed, Access Commercial Finance can provide the solution.
Get in touch today to see how we can help!