Lack of funding is proving the real killer in the construction industry as the main lenders continue to fail one of the most important contributors to the UK economy.

Research from alternative lender Nucleus Commercial Finance shows that healthy construction firms desperate for cash to invest and grow were being turned away from their banks or offered loans at unacceptably high interest rates.

At the same time, it found that one bank was charging a failing customer interest of only 0.2 percent of its turnover, in effect artificially keeping that company afloat. The net result is that other firms would most likely have had to accept higher rates to make up for the loss, or may have been refused a loan altogether.

“The Government is long on talk but short on action,” commented Chirag Shah, managing director of Nucleus Commercial Finance. “On the one hand it talks about the need to encourage alternative lenders such as Nucleus to step up to the plate; on the other, all of its actions are focused around the dominant high street lenders who are the ones responsible for the current mess.

“SMEs – and especially SMEs in the construction sector – require a different kind of capital that requires different thinking and a different approach. They are being turned away from the high street because of the folly of previous lending decisions and are paying the price for other people’s mistakes.”

Nucleus, which recently launched Construction Finance – a dedicated cash-flow-funding product that accommodates the specific challenges of construction contracts – said that of the last 50 construction finance deals it reviewed, 12 of them were in effect ‘zombie’ companies that were to all intents and purposes insolvent.

Mr Shah said that such firms are a draining resource on a sector that is on the road to recovery but continually starved for cash: “For every one company that is a zombie, there are another three that are healthy companies looking for cash.”

Further research by Cashflow Acceleration found that almost two thirds (65 percent) of the 100 construction firms it questioned were actively looking for funding over the next 12 months, and that a similar number (64 percent) could benefit from an immediate injection of cash.

“The main lenders have failed the construction SMEs because they have failed to understand the unique challenges that such firms face,” Mr Shah concluded. “It is time for the Government to give the alternative lending community greater recognition and support.”