Tighter lending forces SMEs to pump more cash back into their businesses

The amount of cash that directors of plumbing, electrical, and other smaller construction businesses pump back into their businesses has jumped 27% in three years as the shortage of bank lending continues, according to Funding Options, an online business finance supermarket.

The analysis shows that directors loaned their sub-contractor businesses £38 million in 2015/16, up from £29.7 million in 2013/14. The businesses included in the research include specialist trades such as electricians, plumbers, plasterers, carpenters, decorators, scaffolders and roofing companies.

Funding Options said that the slowdown in the property market is likely to make it even harder for sub-contractors to secure bank lending. Banks who previously made losses on construction loans after the credit crunch may be more cautious about lending in the current climate.

Banks are increasingly focussed on larger companies that they see as having better security and repayment prospects, as regulators have tightened banks’ capital adequacy rules in recent years.

The wave of insolvencies that hit the sector as major contracting groups delayed payments for longer periods after the financial crisis may also be influencing lending decisions to sub-contractors.

Conrad Ford, CEO of Funding Options said, “Directors have really stepped up into the breach to plug the ongoing funding gap faced by their firms. Confronted by continued borrowing constraints and often faced by long waits for payment, they are ploughing significant amounts of their own money into their businesses to ensure they remain on a firm financial footing.

“Given that the nature of their work often involves quite significant upfront outlay on materials and labour, this is likely to have made a critical difference to the ability of many firms to manage cashflow and keep trading.

“For a sector that is often criticised for the perceived prevalence of cash-in hand payments, this data shows that, in fact, directors are prepared to make personal financial sacrifices for the good of their companies. But it is questionable whether taking such drastic personal measures is sustainable for much longer.”

Conrad Ford, however, added, “More and more successful businesses whose viability is being undermined by cashflow issues and borrowing challenges are finding that alternative financing options can offer an attractive solution.

“We are seeing an increasing number of companies considering unlocking the value of their unpaid invoices through invoice finance, or leasing equipment and machinery instead of buying. Frequently they are finding that such options actually suit their business needs better.”

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