The rules have changed

An ongoing fall in the Australian dollar since the middle of last year, teamed with the increasing cost of capital is putting additional pressures on contractors as they struggle to find a balance between running a healthy business and planning for growth.“Since late 2007, there has been a massive slowdown in the housing construction market and subsequently the land development business,” outgoing Civil Contractors Federation (WA) chief executive officer Nigel Haywood told CIN’S sister publication, Contractor.“Our member companies that are involved in land development have found that, after a prolonged period of high activity, things have come to a grinding halt very quickly and that is very much related to the current economic situation.“There is a serious lack of work out there as a result of increasing interest rates, falling consumer confidence and unaffordable house prices. “All of that happening at once has impacted our members exposed to that area of the industry.“The only way things will improve is if the government is successful in retaining some confidence in the economy by continuing to review interest rates and by trying to funnel as much cash as we can afford into new infrastructure projects.“Even though we are in difficult times now, you can guarantee it will not be forever.“When the next boom cycle comes, we will face a recurrence of the same issues if things are not done now.”Haywood said he was yet to hear of any civil contractors going out of business, but many were doing it tough.“We do not know how much longer the pressure will continue but the indications are that we have not seen the bottom yet,” he said.To minimise the impact of the downturn, Haywood suggested business owners incorporated the worst case scenario into their management plans and considered alternative ways of managing their finances.“Contractors by nature are very entrepreneurial and their capacity to change to suit the prevailing [economic] climate is one of the things they need to be very good at,” he said. “No doubt one of the things many of them would be doing with their fleets at the moment, for example, is investigating wet or dry equipment hire instead of purchasing outright. “It depends on the individual business and how the numbers stack up, but it can be a worthwhile option in situations where finances are tight and the next contract is months away.“There is every chance that over the coming months financing is going to be more expensive to secure, but traditionally businesses have been able to either absorb those costs or pass them on.“In the current market, where a lot of contractors are struggling to get work, there is not really a chance to pass costs on through tendering for example – a lot of businesses are going in with very competitive rates in order to get jobs and there is not much padding [on the figures]. The only option they really have for now is to swallow it and tighten their belts.”GE Commercial Finance equipment finance managing director Kerri Thompson said the key to surviving the crisis lay in the “work smarter, not harder” ethic.“This crisis is certainly more severe than anything we have had in recent history, particularly in regards to how quickly it has impacted the cost and availability of capital,” Thompson said. “We went from a very robust economy where money was being lent at relatively low rates, to a situation where there is now a lot less money and it is a lot more expensive.“This is the time when businesses should be willing to take a microscopic look at their operations, particularly if financing is on the cards.“When we look at new applications, we are really looking at the customer’s understanding of their income and financial metrics – the way their business operates and the contingencies they have in place.“If their cash flows are reliant on a particular project or industry, we analyse how likely that revenue is to continue or soften in the medium to long term. “We also look at ways in which the customer can stay in positive cash flow territory and continue to meet their repayments should a worst case scenario occur.“If companies or their projects look tenuous in this environment, it can be tough for a financier to get comfortable about lending to them.”Thompson said the economic slowdown has forced lending houses in general to become very selective about the businesses they deal with,” she said. “The rules have definitely changed.” “The credit crisis has made capital harder to get – certainly we are seeing the cost of capital increase across every lender in the equipment finance market.“Everyone is feeling the pinch and some businesses are under a lot more strain than others as projects slow down and revenues become affected. “We have had a few instances where a client’s own customers are not paying their accounts as quickly as they used to and that has caused some cash flow constraints.“In some cases, we have offered payment holidays and extension of terms just so business owners can have a bit of breathing space and time to work with us on an action plan.”Thompson said it had been important to track media and markets closely in an effort to keep clients informed and bring a sense of security to the table.“You cannot pick up a paper these days without reading more bad [economic] news and that is reflected in our customers’ reduced levels of confidence,” she said. “We have talked to all of them about the crisis, its implications for Australia and across the globe, and what it could mean for them.“But everywhere you turn, it is a grim story for civil construction, particularly here in New South Wales where the government has pulled back its spending at a time when contractors are doing it tough enough already. “There is a lot of discomfort out there and I think it is fair to say that the industry is very concerned about what 2009 is going to bring.“We certainly spend much more time with our customers these days than we did two or three years ago. “As a lender, it is vital that we help them understand our perspective around what is happening in the market and that we make time to review their financing packages more regularly than we may have done in the past, so that we can ensure they have the right structure going forward.”

Send this to a friend