Instead of waiting for the downturn to end before trying to secure finance, you can steal a march on the competition by acting now.
The construction industry is facing its most challenging period in many years, and companies and individuals in the building supply chain will need to be increasingly astute if they are to weather the difficult times ahead. Although lending levels have reduced, it is still possible to obtain new lending facilities or refinancing on good terms. For construction businesses, it’s a question of finding lenders who understand their sector and are committed to supporting companies through the bad patch.
With UK banks feeling the credit squeeze, allocating capital to satisfy demand has become more difficult, so lending costs are at levels not seen for the past 10 years. And with continuing instability in the global economy, those who have put their plans on hold until pricing and fees come down to more favourable levels before looking to refinance or to take on more debt could be waiting for longer than they thought.
As such, waiting for things to improve could be much more dangerous than acting in the immediate future. Banks continue to support relationship-based transactions in which the pricing and structure meet their increased internal return requirements. However, some banks prefer to focus on their existing customers and are effectively closed for new business.
Of course, companies can do much to make their propositions more attractive. Here are some practical measures to increase your chances of securing funding:
• Use balance sheet assets to make funding more efficient With lenders more cautious about financing businesses, and liquidity scarcer than ever, companies that use assets (plant, machinery, inventory, receivables and so on) to provide security for lending will benefit from more access to credit, as banks feel their risk is reduced. Look for specialists in asset-based lending – especially those with several solutions tailored for the construction sector.
those waiting for pricing and fees to come down before looking to take on more debt could be waiting longer than they initially thought
• Focus on risk management: a key activity in uncertain times Just as the banks are increasingly focused on managing their risk, companies are facing an increasing challenge in managing their own, both from an operating and from a financial perspective. One area of increasing concern in the construction sector is the quality of the supply chain. Certain banks have supply chain finance solutions that can help a company to offer its suppliers access to cash at the earliest possible opportunity, thereby improving their cash flow and mitigating the risk of a key supplier running into difficulties.
• Create greater liquidity for your business In times of constrained liquidity – in the construction sector in particular – the adage that cash is king is as true as ever.
Companies that focus on improving their cash flow by extending supplier creditor days and reducing debtor days, improving their stock turn and limiting capital expenditure to essential items will benefit from increased liquidity. Strict implementation of these financial fundamentals, together with the use of assets to secure additional finance or the use of leasing structures to soften the cash impact of capital expenditure, will allow for additional financial flexibility.
• Leverage current conditions to benefit your business’ future The correction in the UK housing market is already having an impact on the broader construction industry, but this does present an opportunity for businesses to develop and expand at a time when struggling companies may be forced to sell assets, reduce market share or merge with competitors. Companies that have the financial flexibility through an awareness of how to use their balance sheet to secure additional funding will be best positioned to make the most of the current situation before the economy returns to steady growth.
Postscript
Chris Spedding is relationship director of building materials for Lloyds TSB Corporate Markets
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