There were 5.9 million private sector businesses in the UK at the start of 2019, according to the Department of Business, Energy & Industrial Strategy. Of these, 5.82 million were small businesses, with SMEs accounting for at least 99.5% of the overall population in each of the main industry sectors. Crucially, nearly a fifth (1 million) of all SMEs are in the construction industry, and they collectively contribute a massive 12% of total SME turnover.
Despite the construction industry contributing significantly to the UK economy, there still aren’t enough regulations in place to protect these businesses from the crippling issue of late payments. In fact, it was revealed in November 2019 that the UK’s late payment debt amongst SMEs has risen from £13 billion in 2018 to a staggering £23.4 billion in 2019.
The same study showed 78% of SMEs admitted they were forced to wait a month or longer to be paid, beyond pre-agreed payment terms, and 45% are kept waiting two months or more. Worryingly, 24% of SMEs impacted by late payments admitted that this forces them to hold off paying their own suppliers, exacerbating the issue and impacting the business’ own creditworthiness.
This may sound all too familiar to contractors and material suppliers in the construction industry who often pay for materials and equipment upfront, well before projects are completed and invoices are fulfilled by customers. They may also have to account for paying workers and subcontractors on a weekly basis. Unsurprisingly, it’s the younger businesses and start-ups within the construction industry who are often most vulnerable to the issues caused by late payment; they not only have to account for the challenges mentioned above, but also factor in costs associated with starting a business and even take into account how late payment of invoices may delay them from saving up a cash cushion to fall back on when needed.
How businesses in the construction industry can protect themselves from late payments
There are a number of steps that businesses in the construction sector can take to protect themselves:
1. Clearly set out terms and send invoices on time
It goes without saying that it’s vital to complete your due diligence and credit check your customers in advance. This can help to ensure you’re engaging with companies or customers that have a good history of paying on time. In addition, make sure you set out a clear payment process and terms for all projects, whether you’re dealing directly with customers or with other businesses. Include terms and conditions in every contract, and ensure each contract is tailored carefully to the project and adapted accordingly if you notice that a customer has a history of late payment.
Once you’ve completed these steps, ensure all invoices are set out clearly, and sent promptly, with payment dates highlighted. For customers with a less-than-ideal payment history, it’s worth including a reminder of the steps you may have to take if payment is made late.
It’s understandable that small business owners have a lot to juggle, so if you’re particularly short of time, it may be worth looking at the software available to help you manage this aspect of your business. You may also consider hiring an accountant who could support you with chasing payments and advise you on best practice. No matter who leads on this, it’s vital to promptly follow through with your process of chasing up payments, sending reminder letters and chasing customers if they fail to meet the initial payment deadline.
2. Provide a range of payment options
It’s important to do whatever you can to ensure you’re facilitating quick payment from customers. For example, encourage timely payments by offering a wide range of payment options, such as in-person, over the phone, via cheque, online payments or standing order direct debits for customers who may have a monthly contract with you.
Once your business is better established and you have a handle on your cash flow, you could also offer incentives such as prompt payment discounts, or payment proposal plans for customers who have difficulties paying. Accepting a range of payment options and providing customers with flexibility, where possible, will mean that you’re less likely to suffer from recurring late payments.
3. Brush up on the legislation and government-backed support available to you
If you’re taking on a particularly large contract, it may be worth checking the government’s payment practices and performance reporting requirements so that you can set out strict and clear payment terms. Look for clients who adhere to The Prompt Payment Code, and keep on top of annual Budget Statements and legislation changes, which often provide updates on how the government is taking action to stop late payments.
Staying on top of industry news is crucial, along with ensuring your business is agile enough to adapt accordingly. In the 2019 Budget, the Chancellor reconfirmed the government’s commitment to new builds, with a target of 300,000 new homes built annually by the mid-2020s, which will directly impact the construction industry. He announced further skills funding packages and finance support for the sector, along with taking action to stop late payments which cripple the industry. In November 2018, it was also announced that companies which failed to demonstrate prompt payment from September 2019 could be prevented from winning government contracts in a bid to encourage better practice amongst UK suppliers. Keeping on top of such updates can help you stay aware of changes to the industry and adapt your procedures and policies accordingly in order to protect your growing business.
4. Consider a cash cushion
With banks often viewing businesses in the construction industry as ‘high risk’ borrowers, this stigma makes raising finance and creating a cash cushion a huge challenge for business owners in the construction industry. In fact, access to finance was one of the key ‘threats’ to businesses in the industry identified in the gov.uk’s Industrial Strategy: Construction 2025 report, which stated that businesses in the industry face more difficulties in accessing bank finance than their peers in other sectors. As such, it’s no surprise that 35% of SMEs impacted by delayed payments are forced to rely on overdrafts and 10% have to rely on invoice finance to keep their businesses afloat.
But this isn’t the only solution for businesses who find themselves strapped for cash due to late payments; an increasing number of alternative finance providers in the UK have recognised that the criteria that main banks look for when assessing a construction business’ finance application doesn’t always best reflect the potential of the business.
As such, many such alternative finance providers assess different criteria to better understand the potential of businesses in the construction industry who would normally be turned down for finance. They tailor products specifically to those in the construction industry, and provide funding solutions designed to help businesses who are suffering from cash flow issues due to late paying customers. This means that business owners in the construction industry can quickly access the capital they need and get back to finding clients and growing their business.
Alternative lenders are also more agile than banks, and so often offer a wider range of products tailored specifically to those in the construction industry, such as revolving credit facilities, asset finance, and term loans with flexible features. They can often process an application and have funds transferred in a matter of days, a feature that has proved important for the UK’s fast-moving construction industry.
In addition to following the steps above to prevent late payment, it’s worth taking an additional step to protect your business; setting out a clear process for chasing payments means you’ll have a template ready to follow if payments aren’t made within the deadline.
About the Author
Jyoti Patel is a content manager at Fleximize. Fleximize is a UK-based alternative business lender dedicated to providing its customers with the support they need to grow and thrive.