Fall in bank lending to SME construction business

Fall in bank lending to SME construction business

Following on from the Carillion collapse, SMEs continue to face the brunt of it as bank lending falls by another 7% this year

According to a new study by the specialist debt advisory firm, Hadrian’s Wall Capital, bank lending to SME construction businesses has fallen by another £1.2bn this year. The collapse of Carillion has been cited as one of the main reasons as to why this is the case.

The total value was marked at £15.46bn by the end of September 2018; a year before (30 September 2017), it was £16.63bn. This decrease was far sharper a decline than recorded in lending to large construction businesses, which was reduced by 3.5% (£17.21bn) over the same period.

The Hadrian’s Wall Capital report stated: “Following Carillion’s liquidation, many of its subcontractors lost significant amounts of work and were left with substantial bad debts, encouraging lenders to become more cautious about extending credit to smaller businesses in the sector.”

In essence, they are claiming that the effect of Carillion’s liquidation has had a knock-on effect, and thus may have already started to push more construction businesses into insolvency. This is supported by data provided by Insolvency Service, that highlighted that insolvency of construction businesses has risen by 11% in the past year, from 2,645 to 2,924.

Furthermore, the impact of Carillion may have been compounded by the impact Brexit uncertainty is having on the economy in general.

Marc Bajer, CEO of Hadrian’s Wall Capital, said: “The failure of Carillion had a direct impact on the construction businesses who might have been Carillion suppliers of subcontractors, which is further exacerbated by a reduction in available finance to the sector, which makes trading very tough for these businesses.

“For many of those smaller construction businesses, that reduction in lending could hurt their long-term growth prospects. Hiring staff, purchasing machinery, financing new and existing projects – all of these are much harder to do if finance is not readily available.”

Hadrian’s Wall Capital cited how house prices are already falling, particularly in London. Therefore, the prospect of an even bigger decline may be adding to banks’ reluctance when lending to construction businesses.

As it stands, 16% of lending to UK SMEs is completed on a fixed rate basis. The Bank of England is forecast to increase their rates again within the coming months. As a result of this, small businesses that have traditional floating rate borrowing arrangements will very likely see their costs of their borrowing rise. This will reduce their own ability to invest in the growth of their business.

In a difficult economic climate such as today’s, it is vital that businesses secure reliable financing in order to ensure stable platform if they want to continue to grow.

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