Bank lending to SME construction businesses has fallen by almost £1.2bn following the collapse of Carillion, dropping to £15.46bn at end of September 2018, down from £16.63bn on 30 September 2017*, shows a new study by Hadrian’s Wall Capital, the London-based specialist debt adviser.
Hadrian’s Wall Capital says that total lending to SME construction businesses has fallen by 7% over the last 12 months. This is a far sharper fall than in lending to large construction businesses, which reduced by 3.5% to £17.21bn from £17.83 billion over the same period (see graph below).
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.
The effects of Carillion’s liquidation may already have started to push more construction businesses into insolvency. Data from the Insolvency Service shows that the insolvency of construction businesses rose 11% in the year to September 30, up to 2,924 from 2,645 the previous year.
The impact of the Carillion insolvency may also have been compounded by the impact of Brexit uncertainty. With house prices already falling, particularly in London, the prospect of an even bigger decline may be making banks even more reluctant to lend to construction businesses.
As only 16% of lending to UK SME’s is done on a fixed rate basis and with the Bank of England forecast to increase rates again within the coming months, small businesses with traditional floating rate borrowing arrangements will see their costs of borrowing rise, reducing their ability to invest in growth.
Marc Bajer, CEO of Hadrian’s Wall Capital, says: “The failure of Carillion had a direct impact on the construction businesses who might have been Carillion suppliers or 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.”
Faced with the headwinds of difficult trading, businesses need to secure reliable financing to ensure a stable platform for growth. Direct lenders such as Hadrian’s Wall Secured Investments Limited provide such financing ensuring UK businesses have access to funding for their growth.
Banks have reduced lending to SME construction businesses by 7% compared to this time last year, while large businesses have seen just a 3.5% fall
* Source: Bank of England
** Source: Bank of England