Banks resist calls to ride to the rescue of SMEs

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Fears grow that more small building firms will follow Pettifer Construction into administration

Banks are likely to ignore government pressure to extend credit to small and medium-sized construction companies, industry figures have warned.

The claim follows the collapse into administration of four builders in the past two weeks:

£50m-turnover Pettifer Construction, £45m-turnover York House Construction, £18.5m-turnover Linpave and two parts of the Robin Ellis Group, with a combined turnover of £19m.

The collapses came in the wake of the first meeting of the Small Business Finance Forum at Downing Street last month. Peter Mandelson, the business secretary, said the new body was committed to “making progress on resolving the credit issues faced by small businesses”.

One senior financial source predicted many more companies would follow Pettifer and York House into administration.

“There are a lot of crisis talks taking place at the moment,” he said.

Some companies are buying work. I don’t know how they’re going to make any money

Yet, Richard Kelly, construction partner at financial services group BDO Stoy Hayward, said the banks were unlikely to bend to government requests for more flexibility. He said: “The banks are not charities and will not be riding to the rescue of the construction sector next year.”

Jan Crosby, head of construction at KPMG Corporate Finance, agreed. He said: “Most banks view contracting, and particularly housebuilding, as almost toxic sectors and finding new money is difficult. At the very least, it will be much more expensive. Government drives to increase lending to SMEs do not yet seem to be having any effect here or elsewhere.”

A senior banking source added: “No bank wants to be involved in the messy process of a credit workout and pulling the plug on a client is only done as a last resort. Banks continue to provide credit support to the sector, although maybe not at the level – and certainly not at the price – the sector would like.”

Julia Evans, chief executive of the National Federation of Builders, which has 1,700 members with a minimum turnover of £5m, said the banks’ reluctance to lend to SMEs had hit businesses hard. “Many of our members’ problems have been added to by their banks. Fees have been increased and overdrafts slashed overnight,” he said.

The warnings come against the backdrop of increasingly gloomy economic data. Figures released by the Chartered Institute of Purchasing and Supply (CIPS) recently showed the construction industry experienced its largest recorded contraction in activity this month.

Case study: how Pettifer fell

Pettifer Construction was about £5m away from survival, according to one source close to the company, writes Tom Bill.

“It fell victim to the wider malaise in the sector, particularly given its exposure to the retail and residential markets” he said. The family-run company, founded by Tom Pettifer in 1955, had a good pipeline of work but it proved too little to satisfy its banker, Royal Bank of Scotland.

As one financial source said: “A good pipeline of work is one thing. Getting to the holes in the ground stage is quite another in this climate.”

Some argue the writing was already on the wall. The Warwickshire-based company fell £7m into the red in 2007 after a number of problem jobs, and the appointment of Chris Pape from Carillion as managing director was clearly not enough to save it. At the time, the company said: “The settlement of completed contracts produced unsatisfactory results and, together with a number of problematic contracts, affected margins.”

With 140 jobs gone and 150 still at risk in the wider Pettifer Group, the problem now is finding buyers for its estimated 24 projects spread across the West Midlands and south-east England.

Peter Burcow, services manager of the £11m-turnover Niblock said his firm was interested: “We stepped in when Eugena went under in June to finish a £800,000 refurb at the School of Oriental and Asian Studies.”

‘Things are just stagnant’

Gloomwatch - Diane Johnson on what life’s like for a small electrical contractor

Diane Johnson, director of Cheshire-based electrical contractor Eric Johnson of Northwich, said her £2.5m-turnover firm had hundreds of thousands of pounds in fees caught up in retentions from clients. It has put in 80 quotes, but there has been a huge slowdown in orders. “Some companies are buying work,” she said. “I don’t know how they’re going to make any money. I’ve lived through three recessions but I’ve never seen anything like this.”

The firm has had to lay off its 10 apprentices, reducing the employee count from 50 down to 40.

Johnson also described the pressures main contractors are putting on SMEs: “We tender with main contractors, who tell us ‘We’re going in with your bid’. Then they win the contract, so we assume we’ve won too, but they say: ‘We need to do some value engineering’ – basically, ‘Sharpen your pencils because we need to shave your price’. Then they take on the firm which offers the cheapest bid. It’s double-tendering – I’ve no idea if it’s legal, but they’re doing it across the industry.”

She added that there was £51m of business in orthwich, “but not one local firm had any of it”. Work is tendered under EU procurement rules which, she says, cuts off local firms who don’t know how to bid for upcoming projects until it is too late.

“The industry is just waiting. It’s OK for those on longer contracts, but what about the SMEs who go from contract to contract?”

Diane Johnson is on Building’s Gloomwatch panel, which is monitoring the industry through the downturn