Late payments in the property sector are nothing new however the problem is becoming exacerbated due to the volume of late payments and an increasing number of debtor days.
The problem was reported by the BBC back in 2013 and has never gone away. The Construction Index reported that late payments had increased by 27% in 2015, in fact the construction sector has the worst problem for late payment than any other industry sector and accounted for 31% of all payment problems in 2015.
What this means is that a sector that has found funding challenging over recent years is seeing more pressure on cashflow as a result of both late payment and tighter lending guidelines. The sector is sitting in the middle of a perfect storm, sadly it is one that will take done under capitalised and cash scarce property companies.
Dirk Kotze, head of risk at Euler Hermes reported that;
“While some UK industry sectors have seen reductions in overdue payment incidents, insolvencies are set to rise 5% this year and average day sales outstanding (DSO) is expected to edge up to 56 days. The start to 2016 has seen increased volatility, so companies need to remain vigilant”
The key word here is vigilant. When it comes to cash flow and the danger of late payment then vigilance requires options.
The Construction Sector Fear
The sector is unique in how things work. Many constructors are wary of raising issues with late payers and wary of chasing for payment due to a fear of the larger constructor not then allocating them work in the future. For many smaller firms this leaves them in a position where cash flow is tight, gets tighter and if they chase for payment then the larger construction firm see them as financially fragile and wont subcontract to them going forward.
Catch 22, sort of and one that requires options.
Property Sector Funding Options
When it comes to the property sector it is not just about the price of bricks and mortar. Developers and landlords need options to raise finance and raise finance quickly when required.
The challenge for many companies and operators in this sector is that the high street lenders are cautious. What caution means is that the best proposals will get financed but anything that falls outside of that definition (which is an awful lot) fails to get the money. A cautionary approach to lending always means that the more the borrower wants to borrow the less the lender wants to lend – which never benefits the client.
Late payments put pressure on any business but with the property and construction sector where heavy borrowing is a way of life late payments can be terminal. It doesn’t have to be that way.
There are options for companies in the sector to raise finance, the earlier you look at options the more there are. To give some examples of what can be done;
- Lending can be secured against any property with interest rolled up for a period up to 3 years. This releases cash for any commercial requirement. Unlike high street lenders the borrower does not need to prove an ongoing affordability which suits operators in this sector as repayment often comes from a sale sometime after development is completed
- Refinancing existing development borrowing. There are options to refinance development loans, extend terms and restructure repayment. This can enable the developer to release cash, complete the project and bring things to a natural conclusion which truly does benefit everyone
If late payments are starting to be an issue then there are solutions don’t just leave it hoping you will get paid, use the options. If the money comes in you are owed then repay, but do look at the options you have.
If you want to look at your options and chat them through then please get in touch on 01293 541333 or 0207 866 2102.
By Dave Farmer