Just as post-pandemic supply chain issues come back under control, the construction industry faces several new existential challenges.
Consecutive interest rate rises are having a significant effect on borrowing, deterring many potential buyers from entering the property market.
Unsurprisingly, property prices are falling across the UK as buyers struggle with mortgage affordability. And it’s not just a drop in demand from house buyers – appetites for commercial property is also weak as employees continue to choose homeworking over office-based activity.
Falling demand for real estate property has a knock-on effect for the construction industry. One estimate from the Construction Products Association suggests that industry output will fall by 7% during 2023.
This recession is creating major problems for constructors. Most insolvencies to date have been restricted to smaller building companies because of their reliance on fixed-price contracts which cannot keep pace with inflation. As the cost of materials and labour rises, these businesses have run out of contingencies, bankrupting them in the process. However, the rest of the industry is starting to see an increase in payment delays, leading to a cashflow squeeze that could become terminal.
Decreasing demand is fuelling the fall in output, creating a spiral that threatens to delay recovery in the sector. And with each interest rate hike, the problem gets worse.
Old survival techniques won’t work
Over the last decade, businesses have been able to rely on cheap credit to help navigate financial uncertainty. However, interest rate rises are driving up the cost of borrowing, making it ever harder to service debt and maintain cash flow. To survive, construction businesses must get smarter in managing and maximising liquidity – particularly as economists believe that the Bank of England will need to raise interest rates even further to try and tame stubborn inflation.
Rather than extending overdrafts or sourcing new loans (which may not actually be an option), consider adding a business credit or charge card to your payment methods. A business charge card will allow you to pay invoices on time but retain your cash deposits until the balance is paid. In this way, you can extend your payment window without incurring additional charges or interest. You also buy time to cover late payments by your own customers.
Using extended payment windows to protect cashflow could have longer term benefits too. Paying your suppliers on time also helps them to maintain their liquidity – and could help them avoid bankruptcy. This way you can help protect your supply chain to ensure access to the materials and services you need to maintain operations.
Conclusion
As access to sources of funding dry up – or become unsustainably expensive – your accounts payable team will need to be smarter about how they pay bills. By switching payments to a business charge card, you have access to another line of cashflow support which could prove instrumental in maintaining liquidity throughout the current crisis – and beyond.
Ready to learn more about business cards and cashflow maximisation? Get in touch with the Allstar team to see how we can help you.
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