An asset based business line of credit allows a company to draw down funds to pay overheads, wages and creditors in the period of time between the raising of invoices and/or applications for payment and the time taken by customers to pay. The ABL takes its security on the money it advances by way of a legal charge over the receivables. The receivables are simply the amounts due to the company in respect of its invoices and applications under the various contracts the company has with its clients. An asset based line of credit will have a fixed funding limit and an advance rate (percentage) that fluctuates based on the actual accounts receivables balances that the company generates on an ongoing basis.
All over the UK, Specialist Sub-Contractors are having difficulty with bank funding. Why is this? The reality is that High Street banks are not keen on lending to the construction sector. They see our industry as very high risk. As a result, overdraft limits are being squeezed, facility charges are going through the roof and additional security in the form of personal guarantees are being demanded. Sub-Contractors faced with such a challenge are in a difficult position and either have to accept these changes or look for alternative funding solutions. Confidential invoice discounting lines provided by Asset Based Lenders (“ABLs”) might just be the answer.
Historically ABLs have not been keen on lending to Specialist Sub-Contractors. ABLs like certainty and have struggled with the concept of Sub-Contractors applying to a Main Contractor for payment of a particular sum, against which an ABL may have made an advance, only to find that the Main Contractor actually pays a lesser amount than the Sub-Contractor applied for.
We all know that under the law operating prior to 1 October 2011, a Main Contractor was only legally obliged to pay a Sub-Contractor the value of the work it had done in the relevant period. Not surprisingly, the value of work done was often less than the amount applied for by the Sub-Contractor. This left any ABL looking to fund a Sub-Contractor with a very difficult decision. Should the ABL reduce the value of the Sub-Contractor’s advance rate to deal with this uncertainty or simply refuse to fund?
The introduction of the Construction Act 2009, which came into force on the 1 October 2011, changes things for the better.
We all know that every contract must contain an adequate mechanism for determining what payment is due, when payment is due and the final date for payment. We also know that, with one exception, the Construction Act 2009 outlaws both ‘paid when paid’ and ‘paid when certified’. The exception is that it is permissible to expressly exclude liability for payment where there is an insolvency of the ultimate Employer.
This is all great stuff, but the really great news for Specialist Sub-Contractors and ABLs is that payments are now geared around the issue of notices. Sub-Contractors have to be told what is to be paid to them and by when and, if there is default on the part of the Contractor failing to issue a notice, the Sub-Contractor’s application stands as the amount due even if the amount applied for is overstated.
This all makes ABL lending to Specialist Sub-Contractors more attractive. The value of the receivables account is now going to be easier to monitor and the ABL market is just waking up to this improvement. The UK construction sector now has a payment regime which will provide more certainty in terms of Sub-Contractors knowing what they will be paid and when. ABLs love certainty and should now be far happier to lend to Specialist Sub-Contractors.
If you are a Specialist Sub-Contractor and you are having problems with bank funding, the ABL market should be your next port of call.
Vinden is the UK’s leading advisor on construction finance issues. Peter Vinden is the Managing Director of Vinden and can be contacted by email at firstname.lastname@example.org