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The changing debt landscape

Sustained financial pressure is changing the way that debt affects businesses and consumers. With interest rates higher than they have been for many years, the construction sector in particular faces a tough time. It’s more important than ever for your business to keep a tight rein on debt and maintain positive cashflow.

In June, consumer champion Martin Lewis warned that the mortgage ‘ticking timebomb’ he had predicted was ‘exploding’. The moneysavingexpert.com founder said that if interest rates were going to be high over three or four years, people were going to have to readjust their finances. With existing homeowners likely to stay put and first-time buyers struggling with mortgage affordability, the housing market looks set for a correction.

A difficult time for the construction sector

The construction industry is particularly vulnerable to the knock-on effect of higher interest rates. Having already been impacted by rising overheads and borrowing costs, construction businesses now must carefully manage supply and demand to take a potential long-term downturn in the housing market into account.

As the cost of debt rises and residential or commercial building values fall, construction projects become less profitable, potentially even non-viable. Higher interest rates and fewer potential house buyers are likely to lead to projects being downscaled or cancelled, which could involve smaller contractors facing contract terminations or suspensions. Reducing asset prices could impact on a business’ balance sheet, adding more financial pressure.

Increased risk of debt default

With many construction projects involving a complex supply chain, the fallout from high interest rates and a challenging marketplace can affect companies of all types and sizes, increasing the risk that they can’t pay their debts. It’s therefore important to keep lines of communication open, working with clients to understand their changing expectations, and with suppliers to negotiate clear and fair payment terms.

In August, Construction News reported that construction was the sector with the second largest number of companies in significant financial distress during the second quarter of the year.

The article cites analysis from leading insolvency practitioners, Begbies Traynor. They report that higher interest rates can lead to businesses seeing the cost of their debt rising, putting extra strain on companies still suffering from the impact of conflict in Ukraine, higher energy bills and spiralling inflation.

It pays to be proactive

In this changing commercial landscape, it’s vital to do everything you can to reduce the risk of debtors paying late or not paying at all. You should ensure your contracts are water-tight: clearly stating what happens in the event of cancellation, suspension, retention or debt default.

You should also make sure you invoice promptly and follow up with robust credit control, sending statements and chasing letters, as well as staying in touch with the customer via phone or email. Even if you don’t receive payment in full, you may be able to negotiate a part payment or a payment plan.

If you have limited internal resources or your finance team are under pressure, it could be time to bring in a professional debt collection agency. Their experts will be proactive and persistent, while acting with professionalism and integrity to ensure you don’t burn your bridges and destroy relationships with key customers who may simply be suffering temporary financial problems.

We understand your business

At Redwood Collections, we’re highly experienced in taking care of debt collection for all kinds of businesses in the construction industry. We have specialist knowledge of the dynamics and protocols of doing business in the construction sector, giving us the ability to achieve positive results, despite the many unique challenges involved. We can help you take appropriate action to protect your business from the gathering economic storm and continue to Grow Stronger.

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