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:

拢50m-turnover Pettifer Construction, 拢45m-turnover York House Construction, 拢18.5m-turnover Linpave and two parts of the Robin Ellis Group, with a combined turnover of 拢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 鈥渕aking progress on resolving the credit issues faced by small businesses鈥�.

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

鈥淭here are a lot of crisis talks taking place at the moment,鈥� he said.

Some companies are buying work. I don鈥檛 know how they鈥檙e 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: 鈥淭he banks are not charities and will not be riding to the rescue of the construction sector next year.鈥�

Jan Crosby, head of construction at KPMG Corporate Finance, agreed. He said: 鈥淢ost 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.鈥�

A senior banking source added: 鈥淣o 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 鈥� and certainly not at the price 鈥� the sector would like.鈥�

Julia Evans, chief executive of the National Federation of Builders, which has 1,700 members with a minimum turnover of 拢5m, said the banks鈥� reluctance to lend to SMEs had hit businesses hard. 鈥淢any of our members鈥� problems have been added to by their banks. Fees have been increased and overdrafts slashed overnight,鈥� 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 拢5m away from survival, according to one source close to the company, writes Tom Bill.

鈥淚t fell victim to the wider malaise in the sector, particularly given its exposure to the retail and residential markets鈥� 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: 鈥淎 good pipeline of work is one thing. Getting to the holes in the ground stage is quite another in this climate.鈥�

Some argue the writing was already on the wall. The Warwickshire-based company fell 拢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: 鈥淭he settlement of completed contracts produced unsatisfactory results and, together with a number of problematic contracts, affected margins.鈥�

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 拢11m-turnover Niblock said his firm was interested: 鈥淲e stepped in when Eugena went under in June to finish a 拢800,000 refurb at the School of Oriental and Asian Studies.鈥�

鈥楾hings are just stagnant鈥�

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

Diane Johnson, director of Cheshire-based electrical contractor Eric Johnson of Northwich, said her 拢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. 鈥淪ome companies are buying work,鈥� she said. 鈥淚 don鈥檛 know how they鈥檙e going to make any money. I鈥檝e lived through three recessions but I鈥檝e never seen anything like this.鈥�

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: 鈥淲e tender with main contractors, who tell us 鈥榃e鈥檙e going in with your bid鈥�. Then they win the contract, so we assume we鈥檝e won too, but they say: 鈥榃e need to do some value engineering鈥� 鈥� basically, 鈥楽harpen your pencils because we need to shave your price鈥�. Then they take on the firm which offers the cheapest bid. It鈥檚 double-tendering 鈥� I鈥檝e no idea if it鈥檚 legal, but they鈥檙e doing it across the industry.鈥�

She added that there was 拢51m of business in orthwich, 鈥渂ut not one local firm had any of it鈥�. Work is tendered under EU procurement rules which, she says, cuts off local firms who don鈥檛 know how to bid for upcoming projects until it is too late.

鈥淭he industry is just waiting. It鈥檚 OK for those on longer contracts, but what about the SMEs who go from contract to contract?鈥�

Diane Johnson is on 黑洞社区鈥檚 Gloomwatch panel, which is monitoring the industry through the downturn