At Capitalise, we are regularly asked about the latest rates and which are the best new and emerging products in the market.
So in this special article focusing on the Construction Industry, we have asked our Head of Lending, Nick Richardson, to share what his team is seeing across all of our lending propositions.
Q1. Do you see many construction-related businesses looking for finance?
A: We always receive a lot of enquiries from this industry, as it’s traditionally been seen as a very risky sector by lenders, therefore facilities are typically more expensive than in other businesses. We do expect to see a further uptick in applications for both working capital and growth finance too, due to the new Government policies.
Q2. What are some great products for builders & tradespeople?
A: For those who trade B2B with other companies, invoice finance makes a lot of sense. This encourages the business owner to operate best practice, for example credit checking customers before they offer terms. Many facilities also include the requirement to take a trade indemnity insurance policy and when the insolvency rate for this sector is higher than most, this can be very useful.
Asset finance is always recommended for large purchases of vehicles, plant and machinery. As the lender takes security over the asset, for those businesses which don’t have very strong balance sheets, this can be a good option.
Term loans (eg 2-5 years) are useful when purchasing smaller equipment and tools. Plus short term loans (eg 6 months) may be available for immediate working capital requirements, although these will always be more expensive.
The Government Loan Schemes have also been very useful where the application is borderline for a lender. When lenders have the opportunity to use the Government to part-secure the facility, this can often lead to an offer where previously the company would not have passed the underwriting stage.
For example, we completed several loans in related sectors, including one for an electrical contractor. And within two weeks of the Growth Guarantee Scheme being announced, we have already had a term loan offer for a plumbing & heating company.
We expect to see the Growth Guarantee Scheme being used more and more like this.
Q3. How have the lenders changed in recent years?
A: Since 2014, the Competition and Markets Authority (CMA) and Financial Conduct Authority (FCA) have been working to encourage more competition in the retail banking sector, which includes current accounts and facilities for SMEs.
This has been incredibly successful as hundreds of new ‘challenger’ banks and fintech lenders have been established in recent years.
In fact, lending by these new institutions has exceeded lending by the “Big 5” banks for every quarter since Q2 2021.
Technology has also played a big role in the application and underwriting process. For the lenders who use it well, this has sped up their decision-making which is hugely welcomed by companies.
The increased use of data available from credit scoring and open banking now plays a huge part in the lenders’ assessment too. This should ensure the lender is considering applications based on the real world situation for the businesses and they can make more accurate judgements of risk.
Q4. Give me an idea how else there has been innovation
A: Let’s take Open Banking. The background is in 2017, the largest banks, which then collectively held over 90% of the UK’s consumer and small business bank accounts, the so-called “CMA 9”, were mandated to open up their customer data using secure data protocols and develop ‘Open Banking Initiatives’.
By January 2023, Open Banking had over 6 million active users in the UK.
This means that potential lenders, often a different institution to the bank where the main current account is held, can review banking transactions across all a business’ bank accounts - if the company director permits them.
When small businesses typically have very limited financial information available in the public domain, this gives those lenders access to more data to make their credit decision.
For example, lenders such as Triver, can now make offers to businesses based upon an underwriting assessment which, amongst other things, can predict what revenue the company will be making, based on reviewing the pattern of their receipts from customers in the past.
It may mean that offers are made to businesses who would traditionally not have reached the necessary credit hurdle for a facility.
It usually means the assessment is quicker too and we’ve also seen that the company directors aren’t always required to give personal guarantees.
For businesses in this sector, an invoice finance facility with a more traditional lender may only be offered at 50% advance rate, perhaps up to 70% if they have very good quality debtors (whereas other sectors typically receive 80-85% advance).
However, a lender such as Triver can offer over 90% advance on trade debtors, because they believe they have calculated their risk using these additional tools. It’s revolutionising the way lending is done.
Q5. What advice would you suggest accountants gave to businesses in this sector, to get ready for increased trade?
A: I’d say there are three things to concentrate on:
- Adopt best practice when dealing with new customers and suppliers. Check their credit score before you offer terms or decide to work with them. Use Credit Risk Manager to track them constantly, as situations can change quickly.
- Maximise your working capital from suppliers by having as high a credit score as possible, so you can secure the best terms. Use the Credit Review Service when you think you can demonstrate good management accounts, a strong order book and always make payments to key suppliers on time.
- If you then need further lending facilities, help us show your business off to the market when it’s in a strong state, so we can find you the best offers. And give us lots of notice - we will have far more options for the business if we aren’t up against a 7 day deadline to find the funds!
At Capitalise we work with 100+ lenders and Nick and his team are in frequent conversations with them all. So when you need advice about what the market is likely to do, we are at your disposal.
Speak to your Partnership Manager or contact us for more information.
