Housebuilding giants are cashing in, but small builders are starved of funding in the Help to Buy boom?

By HELEN LOVELESS, FINANCIAL MAIL ON SUNDAY

Updated: 06:10 EST, 19 January 2014

Britain's army of small builders is facing a major funding crisis that is threatening the economic recovery and hitting hopes of delivering all the new homes the country desperately needs.

While property prices soar and the big builders report booming business, the million or so independent construction firms that are vital to the industry are struggling to get money from the leading banks.

There are almost a million independent construction firms, accounting for 20 per cent of all small and medium-sized companies, according to the Department for Business.

Crisis: If the building industry cannot gain funding the recovery is threatened

But the latest Bank of England lending figures show that they account for a paltry 7 per cent of  all bank lending to firms of a  comparable size. And, despite the recovery in construction, the figure is actually down from 11 per cent  in 2011.

The figures cover a huge range of building businesses, from one-man outfits to sizeable firms turning over up to £50 million a year, compared with, for example, the more than £10 billion turnover of Balfour Beatty, Britain’s biggest builder.

Noble Francis, economics director at the Construction Projects Association, which represents manufacturers and suppliers, said: ‘When recession hits it always hits the construction sector hardest.

Squeezed out: 'The banks didn't want to know us,' says Jonathan Forbes-Brown

‘The industry really only began to recover in the second quarter  of 2013, primarily driven by a growth in private housebuilding, infrastructure spending and the commercial sector, such as offices and retail space.

‘In the public sector, construction is still very tough. While we are seeing growth, it takes time for this to feed down from the largest construction companies to the smaller players.’

The association is predicting that there will be a 3.4 per cent rise in industry output in 2014 and a  further 5.2 per cent in 2015. But Francis warns there may ‘still be issues’ for many businesses in  the sector.

He said: ‘It takes time for banks to get the confidence to lend to small businesses in this area.
‘In the past 12 months we have begun to see an increase in bank lending to firms in the construction sector, but this is coming from an extremely low level.’

Building boss Jonathan Forbes-Brown says he has experienced the squeeze on funding with his own business, Imperial Waterproofing, in Braintree, Essex.

Set up in 1993, the firm specialises in high-technology roofing and has worked on projects ranging from Wembley Arena to High Down Prison in Surrey, as well as the  University of Oxford’s celebrated Bodleian Library.

Despite a healthy turnover of more than £6 million a year, employing  50 staff and having several projects in the pipeline, when the recession hit, Forbes-Brown found the banks suddenly ‘didn’t want to know us’.

He said: ‘We struggled to get hold of bank managers and then one bank pulled our overdraft of £250,000 without any notification. Lending stopped and we were nearly forced out of business by the banks, despite having lots of contracts to fulfil.’

He has since moved his business banking to challenger bank Metro, which he describes as ‘fantastic’. While it was unable to meet all the company’s funding needs, Metro introduced it to Platform Black, a website that allows firms to auction unpaid invoices to investors in order to raise short-term funds quickly.

Forbes-Brown added: ‘The banks, with the exception of Metro, were terrible. They seem completely risk-averse to any business that is  construction related.’

Platform Black, which began only 18 months ago, has helped firms to find £37million in lending, of which £20 million has gone to construction businesses.

Co-founder Louise Beaumont said: ‘The reality is that construction is critical to our economy. Current predictions are that there will be a shortfall of one million homes by 2020 — the people who build these houses are the construction firms. If we can’t get money to this industry then the economic recovery will also stall.

‘There is a huge change in the way that banks are able to work with smaller businesses, with regulations such as Basel II, which require banks to hold reserve capital against their loans, making it more expensive for them to do so.’

Sue Hayes, managing director of business banking at Barclays, said the bank was ‘not against’ construction lending but added: ‘This is not our biggest sector or a key sector for us, our biggest is agriculture. However, we are trying to expand our lending to smaller businesses in all areas.’
At Lloyds, business banking spokesman Stephen Pegge said net lending to UK construction firms was up £300million in 2013, compared with 2012.

He said: ‘In 2011 we were probably in negative lending in this area, but this has since improved steadily. We expect lending to the construction industry to be a growing part of our business this year too.’

But whatever the banks argue, businesses claim the funding gap is a real threat. John Allan, chairman of the  Federation of Small Businesses, said: ‘Confidence is returning to the construction sector and we wouldn’t want to see anything jeopardise that situation.

‘These figures show a worrying trend which needs to be addressed so this vital sector gets the finance it needs to be able to get projects off the ground, create jobs and strengthen the recovery.’