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Update: The Australian and New Zealand operations of Bibby Financial Services were acquired by Scottish Pacific Business Finance in late 2015 to create Australia’s largest non-bank invoice finance specialist. Welcome to our website.

sp constructionThere are three key concerns for small to medium business owners in the building and construction sector – cashflow issues, BAS red tape and employment regulations.

These are the findings of the latest Scottish Pacific SME Growth Index which polls 1200 owners, CEOs or CFOs of Australian SMEs. Almost one in 10 respondents were construction sector SMEs, so the Index reflects the opinions of more than 100 construction business owners from around Australia.

While BAS and employment regulations are the domain of the Federal Government, cashflow is one issue that SME owners can do something about. Construction industry cashflow concerns are no surprise, given Australian Industry Group figures showing an 8 percent drop in major project work during 2016, on the back of flat or declining conditions in previous years; and ASIC statistics indicating the industry ranked second for insolvencies in early 2017.

With signs the sector is starting to pick up, it is timely for construction businesses to look at how they are funded, and whether their funding source eases or contributes to their cash flow pain.

Traditional credit conditions hamper SMEs

SME Growth Index results show working capital issues account for two of the three main revenue growth barriers: credit conditions and availability inhibit the growth of 69% and 64% of respondents respectively.

The Index asks SME owners to nominate whether their revenues are growing, stable or declining. One of the biggest barriers to growth is cashflow, nominated by 6 out of every 10 growth SMEs as a major issue.

In an economic climate where the banks are tightening lending criteria for small business, construction businesses seeking or relying on a bank overdraft could find themselves in an unenviable position.

Many in the industry are searching for funding that supports strong cash flow management, but without tying their family home as security for their business undertakings.

Alternative options to property-secured finance, such as invoice finance, are becoming increasingly popular, and the SME Growth Index highlights the closing gap between banks and alternative funding.

Since 2014 when the Index began, the percentage of SMEs looking to fund growth via their main bank has dropped from 38% to 27%, with more SMEs turning to non-banks to fund growth (rising from 10% to 22%).

Progress Claim Finance is a new funding option

Progress Claim Finance is one funding solution designed specifically for the construction sector – it is new enough that many in the industry are unaware they can access it.

SMEs servicing the construction industry can use progress claim finance to smooth out seasonal highs and lows and keep money at hand to pay staff and suppliers.

With progress claim finance, instead of a stressful wait for invoices to be paid, once an invoice is raised up to 70 percent can be drawn down against the value of what is owed. This up-front cash injection, of up to $750,000 funding, requires no real estate security.

Trade finance is also being utilised by construction sector suppliers, and examples of those we have funded include builders importing items such as aluminium windows, hardware (taps, sinks and tubs) and even fully built bathrooms that are lifted by crane into apartments.

Trade finance is a form of working capital to finance cross-border transactions (both import and export). For an importer, it allows them to receive funding to buy goods and pay a supplier without having to wait for the goods to be received, sold and turned into cash.

An added bonus for those with progress claim finance or trade finance facilities is the opportunity to take out Bad Debt Protection. This can be significant, given the spate of high profile building industry insolvencies in the past few years.

For subcontractors and suppliers, the ramifications of a customer becoming insolvent can put them in a vicious cycle - they need work more than ever because they haven’t been paid for recent jobs, but they are scared of the risk of taking on more work.

Bad debt protection removes the risk of customer insolvency or inability to pay. This can bring a measure of relief and security to sub-contractors providing services into the construction industry, and we’ve seen it used to great effect by builders, plumbers and glaciers.

How SMEs are funded has a significant bearing on their operations, from how well they can manage cash flow to the pace at which they can expand. It’s crucial to get it right and not think too short term.

Our suggestion for construction industry SMEs is to look beyond the banks as there is an active, innovative space trying to offer a better alternative.

Despite the rise of online and automated funding solutions being offered for SMEs, it is worth noting the SME Growth Index results that indicate the high importance SME owners still place on being able to talk directly to the lending decision maker. SMEs still want an expert funder who is able to provide guidance and support, not just dollars.

For construction businesses looking to solve some of their sector’s small business pain points, it’s worth taking the time to shop around for the right business finance to help fund growth.

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