With the Labour government pledging to build 1.5 million homes, allocate £6.6bn for the Warm Homes Plan, and £7.3bn into clean energy and infrastructure, why does private capital consistently struggle to lend into the sector?

The Sector

The SME construction sector is enormous - it is the largest sector by number of businesses (almost 900,000), the 4th largest contributor to business revenue (joint with IT & Communications), and the 6th largest SME employer.

There are 4 times as many SME construction firms than there are companies operating in the hospitality and accommodation sector. Yet the sector struggles to access funding at a rate that’s 35% higher than the already bleak statistics plaguing overall SMEs (31% of SMEs state lack funding as a limiting factor to their growth vs. 42% of construction businesses). 

So why is it so hard to access capital and for lenders to support the industry? The answer is complex, but boils down to a few key points.

David vs. Goliath

The barriers to entry for construction are fairly low - if you’re handy with a paint brush, have a van, and a few contacts who need a new colour scheme, then you’re halfway there. Where it gets difficult is in the world of clients, projects and main contractors - a large scale site isn’t just completed by one firm, but by potentially 10 or 20 through a waterfall effect. The main contractor brings in principal contractors, who bring in subcontractors, who bring in specialists, who bring in more subcontractors, and so it goes on. This means it is extremely difficult for a growing firm to break into this club, and when they do, getting paid is even worse. A subcontractor has to do the work (often in stages), submit an application for payment, wait for their work to be assessed, complete any rework for sign-off, then they typically wait 14 days for payment by the principal contractor (under the Joint Contracts Tribunal framework). However, 14 days is just not what happens in practice, and even the Government only mandates firms to pay 95% of invoices within 60 days on public contracts. 

JCT is a great set of guardrails for the industry, but it often leads to longer delays, especially when the principal contractor is awaiting payment themselves. And who is at the top of the food chain? The main contractor, which creates a domino effect. A growing SME subcontractor has to pay its staff weekly or fortnightly, pay the upfront materials, fuel, waste disposal, insurances, all before it has had a single payment for their work. Lenders do not like having so many mouths to feed before theirs - the risk of payment dilution is too high - so how can a business even afford to participate? A true battle of David vs. Goliath.

Hurdles to operate 

It was recently reported that an extra 250,000 skilled workers are needed to meet the sector’s demand in 2025. If the supply isn’t there, the labour cost balance shifts, meaning businesses have to pay more to attract and retain talent. That isn’t the only cost that’s increasing - the Federation of Master Builders annual survey for 2023 states 43% of construction firms cite material costs as being a ‘main constraint’. But that’s if you can get on site - 60% have reported that planning permission processes have worsened, although Labour have promised to open 300 new planning offices to combat the fact local planning authorities meet the 13 week decision time in only 10% of instances (minor applications; for major it’s a staggering 1%). This all adds up to extra costs that will be passed on, but also justifies why up-front funding is much needed for the industry. 

When the music stops

If a construction business fails to get paid, fails to obtain funding, and fails to pay their bills, the first issue is their workers will walk offsite. With a shortfall of 250,000 workers there’s no shortage of companies who will take them on. This leaves an unfinished site, so a new business will have to be brought in (and for a hefty cost given the situation). Liquidated damages kick in, workers and their tools are gone, and there’s little left for a receiver to sift through. When things go wrong, they go wrong in a quick and dramatic fashion. And when construction has the highest rate of business insolvencies per sector (upwards of 17% of all insolvencies), it’s little wonder why lenders find it too hard. This is the core reason why the sector is shut out of funding - if the music stops, lenders have no collateral to support the loan, but financing ought to be assessed on a project’s cashflow and not fixed collateral.

What can be done

SME lenders tend to adopt a one-size-fits-all approach. It doesn’t matter if you’re in advertising, an importer, a manufacturer, or a retailer - if you need a loan, you’ll get the same cookie-cutter offering. If you’re in construction? Good luck. You might get asset finance for vans, trucks, yellow goods, but that’s because the lender will own the assets. If you need working capital your options are few and far between, bar a small overdraft or restrictive invoice finance. 

Lenders need to develop specific construction products and policies. To have specialists within their business who deeply understand the needs of the sector. To fund on a per transaction basis (or project-by-project). This exists at the top end of town (project finance; where funds are released in accordance with a schedule) and also for other industries - think film production, where advances are made depending if it’s shooting, editing, or in distribution. 

What type of finance can be provided

The most typical form is asset finance - either hard assets (vehicles, heavy equipment etc) or soft assets (invoices). These are great, but don’t really work when a construction business is paying upfront for materials, equipment and labour, all before they can get paid. 

So what’s the best form of funding? It’s a loan matched to your expenses - draw down to pay your suppliers, pay your subcontracted labour and repay when you’re paid. A construction business can draw down specific to a stage on the project and repay between 1 and 12 months. This is called supplier finance - a product typically available to large corporates, but here at Lenkie we reach thousands of SMEs in need of upfront funding to keep their business growing. Our facility allows construction businesses to draw down to pay suppliers, labour and expenses when they need and all before a single application for payment is made. Our funding is matched to our customer’s cashflow and they have full control to draw down as and when they need, with no arrangement fees or ongoing fixed costs. A truly tailored and flexible form of funding that is desperately needed to keep the sector running. 

At Lenkie, we support more construction firms than any other lender in our sector. To find out how we can help your business, contact us today at hello@lenkie.com or at www.lenkie.com