17/10/2021
"The Number One Problem With Issuing Credit In The Construction Industry!"
Without a doubt the biggest challenge facing lenders in the construction sector is underwriting. However, most banks and lenders still lend within this sector, and, it is important that when construction companies borrow, they do so by providing clear and accurate financial information in their application.
Lenders will always favour companies that borrow to support growth through their operations and their capacity to repay, rather than by borrowing to mitigate past financial losses.
A construction company should do everything it can to present itself as financially capable. It should be watertight in its account records and business projections. This data is a critical decision-maker and potential deal-breaker for construction businesses looking to attract investment and borrow unsecured finance.
For the lender, identifying a companyโs true ability to repay is the key to lending decisions. When borrowers can assure or demonstrate compliance with finance agreements, it eliminates the lenderโs potential exposure to credit default.
How can Unsecured Business Loans help Overcome a Construction Company's Financial Challenges?
Construction companies who address these their financial challenges head-on will be in a stronger position to take advantage of growth than those that donโt take them seriously. There are always issues and obstacles to growth, but identifying and preparing strategies to overcome them are often the key differences between success and failure.
Below we have listed 3 unique challenges construction companies face and how alternative unsecured finance solutions can help:
Challenge #1: Limited liquid working capital
A recurring theme in construction is that โmoney comes in like a train and goes out like a rocketโ! It is a problem that affects all construction businesses who find themselves in the fluctuating sales cycle of boom and bust. It is easy to see how businesses can get trapped in the process of increased outgoings and the costs of finishing projects at a time when sales are reducing.
This pitfall is exacerbated with the way it impacts on the available cash flow deeper and deeper into projects; when multiple projects are being undertaken and outgoings remain huge while the forecast projections can become negative as sales drop.
The increased pressure is seen in cash flow balances. Boosting your cash flow is a key survive-and-thrive mechanism used in construction, and unsecured finance, especially short-term finance, is its most useful tool.
Challenge #2: Poor profitability
The entry-level barrier to construction is low. It always has been. In a saturated marketplace with heavy competition, the ability to become profitable isnโt a short-term luxury. With multiple other companies vying for your business, the returns on completed projects have become lower and this increases the time needed to turn a profit.
The nature of this leads to longer periods of time where your company is in a position where exposure to bad debts canโt be overcome.
The amount that can be reinvested into the business is reduced when poor or shrinking profits are combined with increased overheads and material costs. Businesses often use external funding to overcome this financial trip hazard in order to realise the profit on overlapping projects.
Challenge #3: Project complexity and delays
While opportunities in construction are currently growing, so too is project complexity. Changes to building requirements can often cause unexpected additional costs, meaning construction companies can struggle to keep within expected budgets.
The increase in building projects being subject to changes is a marked one. Projects that donโt complete on time have become almost standard and it rarely results in greater profitability for the construction company. Moreover, project changes are unlikely to be adequately covered with contractual costs being increased, so it results in a higher frequency of payment withholding for missed timescales and budget failures.
Delays in payments and additional build costs arenโt always factored into estimates or aligned with the cut-throat bidding process. Additional finance is often the key to realising a profit on complex projects.
