Economic recovery ‘under threat’ as small builders face funding shortfall

SMALL builders are facing a major mainstream funding crisis that is hitting hopes of delivering essential new homes and other construction projects, according to a leading Yorkshire-based financier.

Reward Capital has warned that independent construction firms are struggling to get money from the leading banks. This is despite many banks claiming that their doors are wide open for business as the economy continues to show signs of recovery.

The British Bankers’ Association itself states that two thirds of all applications for funding are approved by banks yet feedback from businesses themselves suggests differently.

Dave Jones, partner at Reward Capital, said the Leeds-based lender had seen increased levels of interest from the sector over recent months.

“This is partly because of Reward’s ability to offer deals quickly which is often a requirement when a business has been turned down by its bank following months of painful assessment,” Jones said.

Reward said Jones’s view is supported by lending figures by the Bank of England that show that the sector accounts for only 7% of all bank lending to firms of a comparable size.

Reward has lent around £4m to the construction sector over the past six months. Jones acknowledges this is a relatively small amount but argues banks should be doing more to support this critical industry.

He added: “For businesses that raise invoices it is straightforward to get finance because lots of lenders want to do invoice finance deals.

“However, for building and general construction businesses to obtain correctly structured funding is very difficult, particularly now that overdrafts are so hard to come by.

“We are also seeing demand from companies unable to fulfil specific building contracts as overdrafts are now a thing of the past.

“It is a sad situation as we are seeing a growth in private house building, and the wider construction industry, as the recovery in the economy gains momentum.

“The construction sector is a barometer for the wider economy as it is generally the first to be affected in a downturn and the first to see the benefits of an economic upturn.

“Construction is critical to our economy. Reward is here to support business and to help create jobs. We will support small businesses wherever we can and adopt the same criteria regardless of the sector.”

South Yorkshire building contractor, Trelancrest Developments, said it enjoyed problem free construction, fuelled by easy access to bank finance. However, Bryan Hargreaves, managing director said around five years ago it saw the recession coming and experienced the construction industry just about come to a standstill.

The company, which is active in areas including residential and commercial development, supermarket construction and the leisure industry, said it waited for conditions to improve and took an opportunity last December through its Hargreaves Homes arm to acquire a site in Rawmarsh, Rotherham, with planning for seven houses, which it paid for through existing financial resources.

Trelancast invested £280,000 of its owns funds in purchasing  and demolishing an existing health centre and building the first two houses on the site before approaching its long-term banking partner to fund the rest of the scheme.
However, the scheme was deemed as high risk because its development value fell short of the bank’s £3m threshold, leaving the completion of the scheme in jeopardy.

Trelancast turned to Reward Capital. Hargreaves said: “We were looking for £255,000 so we could build the next three houses which would then in turn let the sale of the final pair of house take care of themselves. This worked very well and proved to be the best and quickest way to get the scheme completed so that we could met the demand we were seeing for the units.

“It seems that the banks are happy to get involved if you are a huge national house-builder, but have little or no interest when it is small one off scheme that would see them paid back in a short space of time.”

The Hargreaves Homes development at Rawmarsh has seen four units sell with only three remaining.