A report published by the Department for Business, Innovation & Skills (BIS) in July 2013 has highlighted the ’system-wide importance’ of Specialist Contractors in the construction industry as a result of the high levels of trade credit that they supply to main contractors.
Trade Credit in the UK Construction Industry shows that trade credit is the most important and widespread source of finance for operations in the industry with any further growth in output reliant on the provision of additional trade credit. Specialist Contractors are the principal suppliers of trade credit which puts them at the heart of this system and the report states that the industry would not be able to sustain its output without them.
However, the current situation is placing a great burden upon the balance sheets of Specialist Contractors. As the majority of them receive only a limited supply of trade credit from their own suppliers, they are forced to obtain additional financing from outside the industry. The report reveals that 75 per cent of Specialist Contractors had a positive need for working capital and this often translated into long-term debt. By offering trade credit, they become unsecured creditors which puts them at significant risk because they are fully exposed in the event of any default by main contractors on the outstanding credit.
The risk is not being shared equally by main contractors who have the ability to acquire trade credit from a number of Specialist Contractors resulting in a far lesser need for additional working capital. This privileged position enjoyed by main contractors means that they have a mean net debtor days of just three whilst Specialist Contractors have a mean net debtor days of 22 – a difference of 19 net debtor days.
The findings in the report give added weight to the view that the industry and main contractors in particular need Specialist Contractors not only for their highly specialist skills but also their balance sheets. This puts Specialist Contractors in a strong position and they have real clout to demand a better deal from main contractors on issues like payment terms and retention. The full report can be viewed on the BIS website.