The UK construction sector has consistently demonstrated resilience, recovering from economic downturns and external shocks. However, one of the sector’s key challenges remains access to suitable financing solutions. Traditional lending models often fail to align with the cash flow cycles and risk profiles of construction firms, creating both obstacles and opportunities for alternative lenders.
This comment article explores the evolving financing landscape, emerging trends, and solutions that could help unlock significant growth in the sector.
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The challenge of traditional bank lending
Despite construction’s critical role in the UK economy, banks remain cautious in extending credit to the sector. Factors such as project delays, unpredictable cash flow, and margin volatility contribute to a perception of high risk. A 2023 report found that 15% of UK SMEs faced difficulty securing financing, with construction and specialist contractors among the most affected. While high street banks have shown a renewed interest in SME lending in early 2024, many firms still struggle to secure timely and flexible funding solutions.
Cash flow constraints and payment delays
Late payments remain a persistent challenge, with significant implications for working capital. A Q4 2023 survey by the Federation of Small Businesses (FSB) found that nearly two-thirds (65.8%) of small firms reported late payments, up from 60.8% in the previous quarter. Over a third (34.9%) stated that the situation had worsened, exacerbating cash flow pressures.
The Procurement Act 2023, which took effect on 24 February 2025, introduces measures to improve payment terms on public sector contracts. This legislation presents an opportunity for commercial lenders, as improved cash flow predictability could reduce the reliance on high-interest short-term borrowing and encourage greater investment in long-term financial solutions.
Rising costs and supply chain disruptions
The post-pandemic period has been marked by rising material costs and supply chain inefficiencies, placing additional strain on construction firms. The Office for National Statistics (ONS) reported in 2024 that while overall construction output increased by 0.4%, new work declined by 5.3%. In this environment, access to working capital and project-based financing is more critical than ever, offering lenders opportunities to structure innovative credit solutions tailored to construction firms’ needs.
The rise of alternative lending
With traditional banks remaining risk-averse, alternative lenders have stepped in to fill the funding gap. In early 2024, lending to SMEs by high-street banks increased, yet the most significant growth, according to UK Finance, has been seen in the alternative lending space. These lenders offer greater flexibility, faster decision-making, and solutions tailored to the sector’s cash flow requirements.
Several financing models are proving particularly effective: Invoice financing smooths cash flow by borrowing against unpaid invoices, while asset financing spreads the cost of new equipment. Bridging loans offer short-term support until permanent financing is secured, and leasing provides access to the latest equipment without the burden of ownership. These strategies help construction SMEs stay stable and grow despite market fluctuations.
Technology-driven lending: a competitive advantage
Digital transformation is reshaping commercial lending. Online platforms, automated credit assessments, and AI-driven risk analysis enable lenders to process applications more efficiently. According to the Royal Institution of Chartered Surveyors (RICS), a net balance of +11% of respondents in 2024 anticipated an easing of credit conditions, reflecting a growing willingness to engage with the construction sector.
The importance of speed and flexibility
In a sector where project timelines are critical, delays in securing financing can lead to missed opportunities and stalled developments. Alternative lenders have capitalised on this by offering rapid decision-making processes, often outpacing traditional banks in both approval times and disbursement of funds. Commercial lenders who prioritise agility and tailored financing solutions will be best positioned to meet the evolving needs of the construction industry.
Looking ahead
Over the next 12 to 24 months, alternative lending is expected to expand further, playing a central role in the long-term financial sustainability of construction firms. As technology continues to enhance lending processes, more tailored and sector-specific financing solutions will emerge.
Additionally, regulatory changes such as the Procurement Act 2023 is likely to create a more stable financial environment by improving payment reliability. This, in turn, presents a strategic opportunity for lenders to develop financial products that align with the sector’s changing dynamics.
For specialist lenders, the construction sector represents both a challenge and an opportunity. By leveraging data-driven risk assessment, flexible financing models, and technology-driven processes, lenders can bridge the funding gap and support long-term industry growth.
Alex O’Malley is the Managing Director at Love Finance, a credit broker and lender specialising in providing business loans to UK SMEs.
