Years after the end of the global financial crisis, the impact on capital access is still being felt. The economy is improving, but lending hasn’t returned to pre-2006 levels – and may never again. In this series, we are taking a closer look at the economic factors that are likely to impact lending conditions across the construction industry.
The Federal Reserve and other banking agencies are working to avoid a repeat of the conditions that led to the financial crisis. As part of that effort, they have promulgated new regulations designed to ensure that banks are more resilient, including mandating increased risk weighing of loans and additional staff for oversight and compliance. Some argue that an unwanted side effect of this increased regulatory pressure is a significant impact on credit availability - in a market that was already not the most welcoming for small and medium-sized enterprises (SMEs).
One such regulatory framework, Basel III, was implemented by the Federal Reserve in 2013. The Basel III requirements, which will be phased in over the next several years, aim to ensure banks can withstand any future sudden disruptions in the market by emphasizing adequate levels of high-quality capital, as well as by stress testing and limiting risk. Combined with higher compliance costs due to increased oversight, the changes may mean that even well-qualified business owners, including construction subcontractors, could face challenges getting bank loans. The effects of stronger supervision are often gradual and long lasting. Research from the Federal Reserve has shown that high levels of regulatory oversight can have a statistically significant impact on loan capacity for several years after the new rules are introduced.
Without access to additional financial resources, smaller businesses could struggle to cover everyday expenses and to invest in their future, potentially limiting long-term growth. Alternative finance, including supply chain finance programs, have stepped in to address the financing gap faced by smaller businesses. Supply chain finance provides an alternative to traditional bank loans by enabling buyers to pay suppliers faster, improving cash flow and reducing suppliers’ need for outside financing.
As construction demand increases, construction companies should consider all of the ways to improve their working capital management. A new Textura white paper, “Supply Chain Finance in Construction: Solving the Working Capital Challenge,” explores the various factors contributing to a challenging financial landscape for subcontractors – and how supply chain finance can help close the construction working capital gap.
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