Protecting the health rating of your construction business

Sharon McDougall

Protecting the health rating of your construction business means reducing its risk exposure. In light of economic uncertainty, investor confidence is likely to waver if your financial position is unstable and credit lines are exhausted. Exacerbated by high interest rates and record inflation, investors are hesitant to come on board as they wait for the market to settle.

From supply chain and cash flow insolvency, to emerging competition and ESG demands, Sharon McDougall of Scotland Debt Solutions, a Scottish Trust Deed expert, explains how a host of hurdles can be overcome to make way for a prosperous future.

Economic recovery – As the effects of the pandemic continue to be felt, worsened by the cost of living crisis, profitability is at a natural low for businesses across key UK industries. Perform a financial health check on your business with support from your accountant to identify any blind spots and contingency planning opportunities.

Cash flow and poor debt recovery – Late payments and bad debts can restrict cash flow and impair your ability to pay bills as and when they fall due. A poor debt recovery strategy can result in a stream of overdue payments that can quickly mature into bad debts. This could expose your construction business to late payment penalties, interest and payment demands which is often a precursor of creditor pressure.

If creditors are unsuccessful in recovering funds owed to them, they could set their sights on pursuing this through a legal avenue. This can range from a County Court Judgment (CCJ) which is a formal court order that could be detrimental to your business credit score, or a winding up petition, which could result in the forced closure of your company.

Poor cash flow can also affect your eligibility for business finance, such as invoice finance or asset finance.

The financial track record of a construction business is forensically put under the spotlight when an assessment for creditworthiness is performed by lenders. The higher the debt-to-asset ratio, the higher the risk, which means less competitive borrowing terms. Therefore, construction businesses must protect their financial health and call in their debts at the earliest opportunity.

Supply chain insolvency – The pressure of suppliers becoming insolvent is a fear realistic in today’s economic climate. The coronavirus pandemic led to the shutdown of the construction sector, which meant that businesses were starved of cash and wholly dependent on reserves and government support.

Although the economic recovery is underway, 77,000 construction businesses were in significant financial distress in Q4 2022, according to Real Business Rescue’s quarterly insolvency statistics.

Businesses must protect themselves from the prospect of supply chain insolvency by conducting due diligence, such as obtaining references and performing credit checks.

If a supplier is subject to a winding up petition, search The Gazette to find this information. Companies House is also a valuable tool for due diligence data, such as company accounts, as they provide a window into the financial performance of a business. Dedicated due diligence and business risk software, such as Red Flag Alert, can provide in depth insights into the health rating of a business.

If a supplier is likely to topple your supply chain due as they are insolvent, prepare for this, as this could otherwise disrupt operations, delay the availability of materials, and extend projected completion dates.

Unprecedented competition – Construction is a saturated market that frequently welcomes new entrants backed with fresh investment and replenished credit lines. As such, they can often offer lower price points while they establish their market position. To undercut their prices may not be an option, so seek alternative ways to promote USPs. Here are some factors that can support the health rating of your business.

  • Reputation – An established construction company will have built a strong reputation that they can lean on when competing against competitors. A proven track record, demonstrable experience and first-hand customer feedback are likely to be highly regarded when tendering for contracts.
  • Values – The values at the heart of your business may help secure contracts, as it doesn’t always boil down to price. From the way materials are sourced, suppliers are appointed, to employees are treated, business values convert to currency. This feeds into environmental, social and governance (ESG) policies.
  • ESG position – Your impact on society and the environment shows your commitment as an employer to your community and the planet. From your corporate social responsibility efforts to sustainability initiatives, your ESG standards will help win contracts, resonate with clients, and maintain the health of your business.

All these factors will help regulate demand for your services and brand appeal.