Its time for construction to consider supply chain finance
Australian construction, both public and private, has seen strong growth. However, the availability of credit, particularly to smaller sub-contractors, has contracted and remains expensive. Working capital is the lifeblood of anyone running a small business and remains frozen. Coupled with high finance costs, this puts financial strain on the entire supply chain.
Payment times for the sector are estimated at 14.5 days late on average, making it one of the more problematic industries for late payments. The entire labyrinth of stakeholders, documents, certifications and approvals tends to result in uncertain payment times and unpredictable cash flow. What if there was an opportunity to shift liquidity from main contractors to downstream suppliers, but still deliver unparalleled benefits for all? Supply Chain Finance (SCF) has proven to be an effective solution to offer a win-win for both buyers and suppliers.
If SCF is such a great solution for small business financing in the construction sector, then why haven’t we seen more uptake of SCF in this space? Is Australia ready for this? Our view is that now is the time for large players and government to consider SCF as a tool to unlock trapped liquidity, manage supplier risk and control costs and delivery.
Strong underlying demand
An unstoppable underlying demand for residential, commercial real estate and public infrastructure will put further pressure on the construction and infrastructure finance gap. Over 20 major government infrastructure projects worth at least $2 billion are in the infrastructure pipeline. These include Brisbane’s Cross River Rail, the Western Sydney Airport, the Inland Rail, NSW’s intercity train fleet and Victoria’s high capacity metro trains. Dozens more port, road, housing, prison, school, water and hospital projects are under way, creating a pipeline of work worth well over $100 billion. There are several dominant main contractors in the market that have a strong credit profile and are finding it challenging to keep subcontractors locked in to service their growing projects. Likewise, smaller subcontractors are crying out for alternative finance solutions to support their growth and increased pipeline of work. Financing techniques like SCF will be needed to keep the wheels moving on new projects.
Traditionally, mainstream banks have provided supply chain financing solutions in the Australian market. The banks appetite and risk/return hurdles have led them to shy away from offering the product to this sector. Today, specialist 'fintech' firms are proliferating, offering innovative, easy-to-use solution to link buyers, suppliers and a new class of investors. With interest rates in Australia at an all-time low, investors (institutional, hedge funds, superannuation etc.) are understandably looking for alternative places to invest. These institutional investors come with strong balance sheets and a different risk appetite. Opening up to multiple investors brings funding diversification to the SCF program. Several cash-rich construction companies also see this as an opportunity to self-fund and get better returns than they could from a regular short-term deposits.
From business tools like bid management system SmartBidNet, design software like GoBIM and FingerCAD, logistics and management software like PlanGrid, or cloud-based accounting and invoice finance platforms like MYOB, Xero or Timelio, not keeping up with technology leaves contractors behind, and businesses running less efficiently than they could be. The ConTech wave is an opportunity for the sector to embrace new technologies to drive up efficiency across the industry. New players are bringing new online platforms, software services and driving up
a) visibility across various stages of invoicing and certification
b) powerful data analytics eliminating some of the historic challenges in this space. All of this gives investors/financiers much more comfort.
Stable regulatory environment
For SCF to work in this space, strong mitigants need to be 'built in' to deal with underlying risk. The Building and Construction Industry Security of Payment Act (SOPA) along with Personal Property Security Register (PPSR) provides Australia a unique regulatory environment which drives up transparency for all parties and makes it much easier to facilitate supply chain finance.
High productivity sector
Recent McKinsey report (Feb 2017) has ranked Australia's construction industry as a standout in terms of productivity when compared to other developed countries, with strong project management and a strong workforce. Digital technology and innovation across the supply chain was called out as an area where the sector could extract further benefits.
The network of subcontractors need additional business cash flow to keep up, grow and deliver. The big end of town want to manage their returns and reduce their overall risk. Supplier Chain Finance provides a win-win. The Australian Construction sector has lagged other industries and has not enjoyed benefits SCF can bring. By shifting liquidity from key anchors to downstream suppliers, we have a fantastic opportunity to secure Australia’s future in unlocking the funding needed to support growth, create jobs and helping build sustainable communities.
If you’d like to find out more about implementing a supply chain finance program, or using invoice finance, contact us or call 1300 38 63 63.