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.
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