Without doubt one of the hardest hit industries in recent years has been the construction industry; each month construction companies of all sizes are collapsing. There has obviously been the Covid-19 pandemic that forced construction sites to completely shut down for several months; however, problems around the globe including other countries reactions to Coronavirus, Brexit, a blockage of the Suez Canal, and now the war in Ukraine are all having a major impact on the industry. Construction businesses of all sizes are struggling, but smaller companies are likely to find it even more difficult to manage their finances and stay afloat. This article will focus on finance for small construction companies; however, the information may also apply to larger companies and MC Commercial Finance can support business of all sizes.
Small Construction Company Finance
Cashflow is the biggest cause of collapse for companies in most industries, or more specifically lack of cashflow. Unless there is money in the bank to cover expected and unexpected expenses it is very difficult for a business to function effectively. Small construction companies are generally those that work on smaller projects, have less than 50 staff and a turnover of less than £5.6m annually; this accounts for over 99% off construction companies in the UK, you can find out more about these statistics here.
Managing cashflow is the number 1 priority for any business that wants to be successful, we have a blog dedicated to the importance of cashflow if you’d like to find out more. This isn’t a case of not spending money as that prohibits growth, it is understanding when to invest, when to save, when to take on finance. A commercial finance broker can be an invaluable source of information, advice, and support for small construction companies. Taking on appropriate finance at the right time, with the right credit company can be the difference between success and failure particularly when times are difficult. There are many different types of finance suitable for small construction companies including:
- Asset finance
- Invoice finance
- Bank loans
Asset Finance for Construction Companies
Large or small construction companies require tools, equipment, and machinery to complete projects. The cost of these tools whether to lease or purchase can present a sizable outlay for the business. Asset finance is designed to help companies meet the costs of purchasing any asset that is essential for the day to day running of the business.
There are different types of asset finance, the differences primarily revolve around whether you want to eventually own the asset. A hire purchase agreement splits the cost over a set number of months, with a pre-determined rate of interest, once every payment has been made the asset will belong to the business. Whereas for example, equipment leasing allows you to pay a lower sum to use the asset for a set period, however, once the timespan has elapsed the equipment is returned, and the company cannot own it. Leasing is useful to allow you access to machinery that is costly but would not be used frequently, purchase agreements are more suited to tools and equipment that are essential for most work that is undertaken.
Invoice Finance for Construction
Invoice finance is an invaluable tool when the aim is to grow your construction company and take on a project that would be financially out of reach. Invoice finance allows you to get paid for an invoice faster than you would otherwise, meaning that you can finance the purchase of materials, equipment and/or labour that is required to complete a large project. When the project is complete, the invoice is paid by the client, clearing the finance. There is a cost for this type of finance, however, as it allows you to take on a larger project it can improve profitability and drive business growth when used appropriately. Using a broker to organise invoice finance for your construction company will give you access to the best deals and ensure that the process from application to completion of the loan is as streamlined and hassle-free as possible.
Construction Company Bank Loan
Bank loans are the most traditional type of commercial finance, and they can be a useful tool for businesses in the construction industry. Bank loans can be used for a wide variety of purposes and can provide a boost to cashflow however, loans can be costly. Approaching a broker to help you to secure a loan is likely to result in a better deal from a lender that meets the requirements of your business.
Commercial finance can be a useful tool for construction companies small and large; however, when taken out without full consideration it can cause more financial problems. Whichever type of finance you take it needs to be repaid. Invoice finance has an in-built way of being repaid and the ability of the client to repay is considered when the loan is granted. However, for both asset finance and a bank loan your business will need to be able to afford the monthly repayments. Having a set payment is beneficial for forecasting and financial planning, however, if you cannot make the repayments your construction firm could be put into an even more precarious position.
For this reason, it is always advisable to use a broker and speak with your accountant or financial advisor before taking on any type of finance. A broker will take the current position of your business into account and advise on the best type of commercial finance to meet your requirements. They will also assist throughout the process and know which lenders would be the best fit, and most likely to offer the best deal. Contact MC Commercial Finance today to book an appointment to discuss the finance options for your small construction company.