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32| Flexible finance
Positive winds for construction sector helped
by flexible finance methods Judith Totten, Managing Director
at Upstream Working Capital examines the construction
market’s finance options
It’s no secret that
accessing appropriate
and flexible finance has
not been easy across
many sectors since the
banking crisis and for
some companies, listening
to fireside experts and
battening down the
hatches rather than
investing for growth,
seemed the sensible and,
at times, only option.
Not only is it a soul destroying
strategy but it will at best plateau
business growth and evolution
and in reality as business owners
prudently turn away new and
stretching business opportunities,
they can be sure that one of their
competitors has found a way to
make it happen.
The construction sector has
suffered more than most and
many institutional funders have
had to restrict their support in
this and allied industries. This may
seem unfair but in a corporate
environment it is impractical to
analyse each individual transaction
on a personal basis and instead,
with policy and procedure, comes
a perceived inflexibility.
With headlines like “NI
construction sector has best
performance in three years”, there
is certainly much to be be positive
about but we are still operating
against a low bench mark and
uncertainty in the sector is still
rife. However if every £1 invested
in construction in NI, generates
£2.84 for the wider economy,
then this is a sector we must find
solutions for.
Funding a construction business
is not and has never has been
straightforward - no surprise
to those reading who have
worked in the industry over the
years – but the important thing
is it is achievable with some
effort and an open mind. Enter
the alternative funder, whose
popularity in recent years is
on the rise, thanks to a more
flexible approach. Their approach,
while not suitable every time,
is dramatically aiding businesses
with a promising future but a
requirement for a solution that fits
with them.
Even before the Banking crisis,
the mainstream institutions would
have required strict covenants and
management processes to release
cash during building cycles or
construction programmes.
These processes and ‘audit trails’
instil essential disciplines which,
whilst irksome, stand a business
owner in good stead when they
look for alternative funders. The
critical part for any financier is
transparency across a business.
They need to understand the
cash cycle - when it buys, when
it builds, when it sells. How long
a contract takes and the tipping
points, therein where the business
will be most cash constrained
and most cash positive. The
experienced lender will then
endeavour to match a facility to
that business’ pattern.
Clearly not every business
will be the same and not every
contract will be structured over
the same pattern but clarity and
open communication will make it
easier to finance.
Within the contract period,
a robust paper trail for the
funder to understand is crucial.
Ideally independent sign off by
the Quantity Surveyor on the
business’ side and on the buyer
side is ideal, with a release of
payment certificate following.
Again, not always possible but for
a business’ own protection and
that of the funder, this is the best
option.
The risk for any financier in a
contract related business is non
performance part way through
and resultant loss. Therefore, it is
incumbent on the borrower to
mitigate such risk at every point.
Additional, or secondary security,
over and above the primary
debenture
is often
asked for
Business
owners
need to
be open
minded
and expect
to be
asked for
personal
security or
additional
asset
charges
where
possible.
The more
comfortable a funder is with
the risk profile and the ability to
recover in a default situation, the
more funding they’ll be able to
offer.
Solutions are out there and
available. We are now seeing Asset
Based Lending (ABL) whereby a
funder will leverage more than
just a land bank and build costs
for example. They will analyse
entire balance sheets to see what
can be generated with a cross
collateralised security suite - often
against debtors, stock, work in
progress, fixed assets, plant and
machinery. This is creative and if
handled by a skilled practitioner,
can release much more than the
traditional term loan or overdraft
as it is released in real time.
Consider supply chain finance,
stock finance or purchase order
finance - all variations on a facility
to release funding on the buying
side of a transaction and all
designed to work in complement
to existing bank lines. These
funders are generally ‘off balance
sheet’ as they sit as trade creditors
in a business and therefore have
no impact on its existing facilities.
These funders will buy stock and
raw materials, will offer extended
creditor terms and will give a
business buying power during a
contract term. There are terms
and conditions as with any facility,
but these funders are flexible
and very happy to sit alongside a
business’ primary bank.
Traditional Invoice Finance is
difficult to structure for a contract
related business but consider this
-is every transaction structured
around stage payments, QS
measures and certificates or are
there some more traditional
rolling accounts? If there are
some straight supply, time sheet
based or short term work, then
there may very well be a facility
to release some cash locked up
in debtor books. Indeed there
are some funders who will look
at contract invoice discounting,
but there will be some restrictive
covenants in terms of cash release.
Asset Finance to fund plant
and machinery should always be
considered in a business which
uses and holds cash in the cycle.
Manage cash flow wisely and avoid
tying up liquidity in fixed assets.
In summary, there are many
funding solutions for every
sector. A cocktail of facilities
is, in my opinion, much more
preferable to a narrow, single
funder line. Flexibility is key to the
construction sector and the ability
to renegotiate and restructure is
vital.
Construction is a key industry
for NI and growth is evident –
let’s work together to strengthen
it further.