Why Small Contractors Don’t Have To ‘Walk The Credit Line’
The sun hasn’t exactly been shining on small contractors in the construction sector of late. Months of poor weather has delayed projects and the prospect of the federal election has made developers and government departments antsy about starting new works.
Subsequently the cash pool is getting very low. Many are talking a big game post election, but kick-starting from a low base is tough, especially if you’re relying on a ‘line of credit’ mechanism from a bank. Furthermore, most other credit supports are limited to refinancing, mortgage and transaction-based.
The common thread running through these mechanisms is that all of them are collateral intensive. Banks carefully scrutinize the capital adequacy of small contractor that seeks funding.
As a result, many small contractors are being pushed to the wall because of low solvency. They simply cannot obtain finance to fund growth.
The same applies to start-ups attempting market entry. Immature credit histories and weak balance sheets are hardly the platform to launch you into an industry with high entry barriers.
Irrespective of which party wins the election, I can’t envisage lending criteria loosening anytime soon. However, one potential solution that has recently become available is called Project Finance (PF
PF uses the credit of the entity ordering the service (i.e. a government department) to finance the contractor. This is achieved through a third party conduit – the project financier.
Assistance can be rendered at the tendering stage, where a poor and/or immature credit history or weak balance sheet can be obviated because of the financial strength of the project financier.
The Project Financier can also provide small contractors with the mobilization and working capital funding necessary to execute contracts.
PF smacks of common sense. There’s an inherently sensible point of demarcation. Builders build. The Project Financier manages the funding.