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What options are available when a contractor is withholding payment?

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What options are available when a contractor is withholding payment?

Reviewed: 8th May 2017

When main contractors withhold payment, it can cause serious financial difficulty for other firms, potentially affecting an entire supply chain. Withholding payment is a common occurrence in the construction industry, where a number of smaller firms often have to wait unnecessarily for payment because of the actions of the main contractor.  

A high level of construction company insolvencies is proof of a flawed system that penalises firms through no fault of their own, resulting in a higher number of insolvencies than many other industries.

If your business is under threat because of contractor non-payment, whether you are in construction or any other industry, you may be able to protect your cash flow using a variety of measures. 

Alternative lending

Strict lending criteria from high street banks and other ‘mainstream’ institutions have brought alternative lending to the fore for many companies. This type of lending offers a number of advantages, including flexibility of terms and conditions, and fast access to lump sums or regular inputs of working capital.

A particularly valuable form of alternative funding for subcontractors and other firms involved in a supply chain is invoice finance.

What is invoice finance?

Invoice finance allows you to borrow money against the value of your sales invoices. It offers regular cash injections throughout each month, with amounts being dependent only on your level and volume of sales invoices. 

Poor credit rating is not an issue, and there are no lengthy application procedures - if you’re eligible you gain fast access to the cash needed to stay afloat. Two forms of invoice finance exist, both of which work under the same premise – to advance a pre-agreed percentage of each invoice shortly after it is issued.

Invoice factoring

Invoice factoring offers a full credit control and sales ledger management option, if you want to hand over control of this area to the lender. This frees up valuable time to gain additional contracts and increase sales – this is important as the amounts of cash advanced each month can grow alongside the sales.

Invoice discounting

With invoice discounting you remain in control of the sales ledger, and your customers/sub-contractors are unaware that you’re using this type of finance.

Benefits of invoice finance

  • Cash flow is boosted by regular cash receipts
  • Low risk for the lender
  • Flexible form of finance

HMRC Time to Pay

HMRC offer an extended period of time to pay arrears of tax and National Insurance to companies they believe are in temporary financial difficulty. If you have fallen behind with tax or NI, a Time to Pay arrangement could help, but you need to act quickly.

This isn’t available for insolvent companies, or those which HMRC believe are simply reluctant to pay. If you can put forward a strong business case, you may be offered up to 12 months extra time to pay, although the usual term is around 3-6 months.

It’s important to support your proposals with documentary evidence including cash flow forecasts, and sales/profit projections. It can be a little daunting to negotiate with HMRC as they are known to be stringent in their requirements, and quick to respond to any breakdown of agreement terms.

For this reason, we are often asked to liaise with the tax office on behalf of companies in your situation, using our professional knowledge and expertise to deal with their specific concerns.

Benefits of a Time to Pay arrangement

  • Legal action by HMRC is averted
  • Allows for better cash flow management
  • You stay on good terms with HMRC

Asset-based lending

If your firm owns one or more hard assets, such as vehicles or plant and machinery, you may be able to use their inherent value to strengthen the cash position of your company, should a contractor fail to pay.

This form of finance works on a sale and leaseback arrangement whereby you receive a cash lump sum from the lender, retain full use of the asset(s), and repay a fixed sum each month. One of the benefits of this type of borrowing is that you’re using the asset to its fullest before it starts to depreciate. 

Benefits of asset-based lending

  • Repayments are tax-deductible
  • A fixed interest rate applies
  • You can budget more effectively

If you are experiencing increasing levels of financial distress, Real Business Rescue can advise on your best options. Call one of the team for a free confidential same-day consultation to discuss your situation. Our extensive office network comprises 55 offices across the UK with a partner-led service offering immediate director advice.


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