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How the construction sector can avoid a cash flow crisis following Carillion collapse

How the construction sector can avoid a cash flow crisis following Carillion collapse


How the construction sector can avoid a cash flow crisis following Carillion collapse

Carillion's spiral into liquidation has piled even more pressure on the UK construction sector which was already feeling the pinch from rising costs and wafer-thin profits.

Carillion's reputation as the UK's second biggest construction company, amassed following its involvement in major projects such as the HS2 high-speed rail line, ultimately counted for little as it failed to secure a rescue package as the firm racked up huge debts of around £1.5bn.

It's not just Carillion and the 20,000 workers it employs in the UK who are now nervously looking over their shoulders. The Government has only pledged financial support for the fallen construction giant's suppliers until 18 January which will trigger a cash flow crisis for several small firms.

In 2016, Carillion spent £952m with local suppliers and as its financial difficulties worsened the company is said to have extended its payment schedule to small firms to 120 days. Monday's sobering development will now leave them with combined losses which are estimated to stretch into hundreds of millions of pounds.

The late payment burden

According to *research published in November 2017, late payments to construction companies hit a five-year high in 2016, with businesses facing an average wait of 69 days for their invoices to be paid. Carillion's untimely demise is only going to exacerbate this escalating problem.

The lifeblood for any business is ensuring they are paid on time. A customer missing an expected payment date can cause a ripple effect which can damage a firm's ability to maintain a healthy cash flow and potentially stifle investment needed to drive the business forward.

It is a perennial problem for the 5.7 million SMEs in the UK as it is estimated that at any one time they are owed £14bn. If those invoices were paid on time the UK economy would receive a £2.5bn boost.

Funding support for the UK construction sector today

While Government initiatives to tackle late payments are welcome, they are little consolation to the thousands of UK construction SMEs who require financial support today.

Given that businesses have to pay VAT on invoices before receiving payment from their customers, understandably many construction companies have significant concerns about their ability to fulfil their financial commitments.

VAT payments in particular often represent large outgoings for firms which can regularly impact their cash flow. Reassuringly, there are more flexible ways to help relieve the burden of the dreaded quarterly bill.

Specialist alternative finance providers to SMEs, such as Wesleyan Bank, provide tailored funding solutions to enable businesses to spread the cost of their VAT bills over a 3 to 12 month period.

SMEs can benefit from peace of mind that their quarterly outgoings can be fixed and quarterly payments are applied to coincide with HMRC's payment schedules.

Paying over time for short-term liabilities, such as VAT, can have positive effects for SMEs including greater financial control, more predictability over expenditure to smooth peaks and troughs and increased availability of working capital.

Solutions to help manage cash flow

Carillion's plight will place even greater financial hardship on the UK construction sector as the gap to receiving invoice payments is likely to grow wider.

However, trusted and experienced alternative finance providers can offer light at the end of the tunnel by providing firms with the vital access to funding they need to maximise profitability at a time when they really need it. 

Invariably, many alternative lenders have a greater understanding and undertake a more flexible approach towards an SME's overall financial position compared to high street lenders. In doing so, they work in close partnership to ascertain how alternative finance solutions can help a firm to invest in new assets to drive growth without compromising their existing banking lines.

As a result, construction companies can approach the future with a greater degree of confidence instead of worrying about the ramifications if another 'Carillion' type scenario manifests tomorrow.

Wesleyan Bank provides comprehensive short, medium and long-term finance solutions for SMEs to cover cash flow expenditure, investments in IT and specialist equipment, partner equity loans, business acquisitions and commercial mortgages.

For further information, please contact the Wesleyan Bank team at commercialtax@wesleyan.co.uk or call 01606 338001.

'WESLEYAN’ is a trading name of the Wesleyan Group of companies.

Wesleyan Assurance Society and Wesleyan Bank Ltd are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Wesleyan Financial Services Ltd, Wesleyan Unit Trust Managers Ltd, Practice Plan Ltd and DPAS Ltd are authorised and regulated by the Financial Conduct Authority.  Advice about investments, insurance and mortgages is provided by Wesleyan Financial Services Ltd.

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