25 June 2020: With most construction grinding to a halt at the beginning of lockdown, many invoices are now going unpaid. ICAEW Member Richard Webb, MD of Newton Steel Framing, argues that further government-backed schemes are needed to prevent a credit crunch that could severely damage the industry.

When the construction industry is working effectively, money flows reasonably readily through the supply chain to the smaller suppliers and between SMEs themselves. However the sudden and unexpected stop COVID-19 has placed on the industry means projects are being paused, sales aren’t completing and cash flow has been strangled throughout the sector.

Richard Webb works at the heart of the construction industry running his own steel frame company, but has previously worked for two of the Big Four. He explains the impact this crunch is having: “Usually, as long as a construction firm keeps buying from a supplier, they’ll keep receiving trade credit. But of course, when this stops, suddenly much of the contractor’s liquidity goes into paying off old creditors.

“Meanwhile suppliers ask who they can give credit to in this environment. Soon the industry is in a situation where firms have had their liquidity drained through the passage of time, there is a broken trade cycle and no one can get credit.”

As with many things, this squeeze isn’t affecting every business equally. Larger businesses are not only better placed to absorb this lack of income but have access to arrangements such as the COVID-19 Corporate Financing Facility. Therefore, despite Bounce Back Loans helping at a lower level, Webb believes growth SMEs are most likely to go under as a result of this.

Webb believes that the restart period we are now entering is crucial and it will take significant support to make sure businesses are able to get back on their feet, especially given that productivity will be cut as a result of social distancing measures. He argues that solutions, such as invoice discounting arrangements, broader insurance policies and mortgage continuity guarantees, if backed by government would get the industry moving again and prevent businesses going under.

Government-backed discounting arrangements

Webb believes it makes sense for the government to take on some of the credit risk. “The government backing of discounting arrangements would work well because you can use the existing invoice discounting arrangements and platforms that the big clearing banks and specialist invoice discounters have,” he explains. This would get cash moving and shorten the time to receive payment, reducing pressure on working capital so people can then start to position themselves for growth and move things forward.

Extend business interruption insurance

This is the ideal time to deal with some of the exclusions in many commercial insurance policies , by extending business interruption cover to include losses incurred as a result of COVID-19 – the majority of policies currently don’t cover this.

Such a move would have to be financially supported by the government, but he says: “It's a great way of distributing money quickly for those who need it. For example our business interruption insurance is written on a gross profit insured basis, so you could simply say that the government will pay you three months gross profit based on the figures you’re insured for.”

Mortgage continuity guarantee

The house building industry is a key one to keep moving to stimulate the economy as it’s a significant employer and generates huge manufacturing demand. But to keep people buying new houses, Webb believes the government needs to give them the confidence that if they lose their job their home won’t be repossessed. A scheme to cover the interest element of your mortgage if you are laid off could hold the solution.

Webb estimates the interest payments on a £500,000 mortgage are no greater than typical housing benefit payments. “If you were to be politically minded about it, you could even say that the additional margin over base rate becomes payable to the government, and the scheme then costs the government next to nothing,” he says.

Webb accepts that these interventions require large sums of cash, but that since the COVID-19 outbreak began the government has made many similar moves to support the economy, so it’s not without precedent. He also believes ICAEW has an important role to play in lobbying the government to bring about these kind of significant changes.

In the meantime, his advice for other SMEs facing the credit crunch head on is to try and negotiate with creditors who are in a position to give you forbearance. He also suggests working closely with the suppliers you most want to continue your relationship with and try to agree slightly extended payment terms. In terms of what not to do, he warns against small businesses disputing an invoice they’re unable to pay, as it could create “all sorts of unintended consequences of insolvency”.