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Managing late payments in the construction industry

PUBLISHED ON: 23/09/2023

How can I protect my construction business from late payments?

A culture of late payment in the construction industry makes it difficult for companies to make decisions with confidence, such as those that would ordinarily help them grow and increase profitability.

Complex supply chains provide a further obstacle to success for construction companies and with the risk of late payment being very high in this industry, firms should be proactive in managing the situation.

So how can you manage late payments in construction?

Good credit management

Credit checking new customers is the crux of good credit management as it helps you decide how much credit to grant at the start of a new business arrangement. It’s also important to regularly check existing customers’ creditworthiness given how quickly a business can decline.

Charging interest on late payments

You’re able to claim statutory interest on outstanding payments at the rate of 8 per cent plus the Bank of England base rate. Stating this in your terms and conditions and displaying it clearly on invoices can encourage payments to be made on time.

Using technology collaboratively

Cloud-based construction technology enables construction firms to take a collaborative approach and significantly ease the negative day-to-day impact of late payments within the supply chain.

Construction funding

Finance options that specifically address the problem of late payment in construction reduce the pressure on working capital and encourage healthy supply chains. Potential options include:

Supply chain finance

Supply chain finance is just one form of funding that significantly alters the operating environment of a construction firm by providing upfront payment of invoices. It’s a short-term form of funding that allows the borrowing business to extend its payment term.

There are multiple benefits to supply chain finance, however. A particular advantage for smaller members of the supply chain is that this type of finance is based on the credit rating of their larger contractors, which eases cash flow problems through the supply chain.

Invoice finance

Invoice finance also provides construction firms with regular payments of working capital as the lender pays around 90 per cent of each eligible invoice, usually within 24 hours. The remaining amount is released when the invoice is paid in full.

If invoice factoring is used, the lender can also take control of the company’s credit control function, which frees up time to pursue new contracts or otherwise grow the business.

The ripple effect of late payments

One of the problems of late payment in the construction industry is the knock-on effect on other businesses. This can compromise an entire construction project and, in the worst-case scenario, create multiple insolvencies of smaller construction suppliers.

If you’re in the construction industry and would like more information on how to manage late payments, please contact UK Business Finance. We can also provide guidance on the best form of funding to mitigate the risk of late payment. Our team offers free consultations and works from an extensive network of offices around the country.

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