UK Construction SMEs in hot water as funding crisis reaches boiling point

• UK Construction companies experience a 45% increase in financial distress over past year
• 20,163 construction SMEs now suffering from ‘Significant’ distress, with little hope for bank finance

Despite favourable market conditions for the construction sector, the number of Construction SMEs suffering ‘Significant’ financial distress continues to rise as traditional lenders tighten their purse strings, cutting more firms off from vital funding, warns business recovery specialists Begbies Traynor.

According to the latest Begbies Traynor Red Flag Alert for Q1 2015, which monitors the financial health of UK companies, the UK’s construction industry has experienced a 45% increase in ‘Significant’ financial distress over the past 12 months, rising to 20,770 struggling businesses compared to 14,337 in the same quarter last year.

While distress levels among larger construction companies have remained largely flat over the period, falling from 610 businesses in Q1 2014 to 607 in the first quarter of 2015, SMEs in the sector have struggled to keep their heads above water given fewer opportunities for bank funding in today’s increasingly hostile lending environment.

Begbies Traynor’s research reveals that 97% of the sector’s struggling businesses are SMEs; with ‘Significant’ distress levels increasing dramatically over the past year, from 13,727 companies in Q1 2014 to 20,163 Q1 2015; a rise of 46%.
Julie Palmer, Partner and property expert at Begbies Traynor, said:

“While small housebuilders, developers and construction firms contribute a huge amount to the UK’s housing and construction output, in recent years these smaller companies have declined in number and have missed out on the growth opportunities that their larger peers have enjoyed. At the heart of the problem is a general reluctance to lend to this important group, which is seriously obstructing their growth and contributing to the rising levels of financial distress that we are seeing today.

“The construction sector has always proved difficult to lend to as many elements of their contracts are complex, subject to dispute and suffer from lengthy payment terms, making them high risk investments for the cautious banks, who had their fingers burnt during the last financial crisis. Unfortunately, the Prompt Payment Code has had a negligible effect on late payments so far and under intensified financial regulations, the banks have become even more risk averse. With insufficient alternative lenders to plug the gap, construction SMEs are being left without the capital they need to move forward.

“Looking ahead to the election, the outlook for the construction industry remains positive, as all the main political parties recognise the important contribution that the sector makes to the wider economy. However many of the proposed policies are too focused on the end consumer and do not go far enough to support construction firms at the bottom end. 

Ultimately there need to be more avenues for SMEs to access funding, and no sector needs it more than construction.”