UK rental companies vulnerable to poor credit

New research published by Creditsafe has revealed that a significant number of UK hire companies renting to the construction sector have been asked to renegotiate contracts; lost money through insolvency and have noticed an increase in defaulted payments. Creditsafe recommends that more thorough credit check s could reduce companies' vulnerability.

More than a third (36%) of companies that hire construction equipment including scaffolding, tools and cranes have attempted to renegotiate the terms of their original contracts in the last 12 months.

Creditsafe said that since long term contractual arrangements underpin a significant proportion of the revenues and profits of leasing and hire firms, this trend could have a potentially dramatic impact on the financial forecasts of companies servicing this sector of the construction industry.

Two thirds (66%) of companies specialising in leasing equipment to the UK construction and building industry have seen an increase in late or defaulted payments from customers in the last 12 months. Given the importance of cash flow to business survival, Creditsafe said this is likely to have significant implications as companies are forced to draw on capital reserves or expensive borrowing facilities to meet their obligations.

The impact of bankruptcy and insolvency is particularly affecting firms servicing the construction industry. Eight in ten (79%) companies leasing equipment to the construction industry have lost money as a result of customers becoming insolvent in the last 12 months. By comparison last year just 16% of firms offering commercial vehicle leasing services and just 6% of those involved in leasing commercial property lost monies as a result of customers becoming insolvent.

David Knowles, business development director at Creditsafe, said, "The renegotiation of contracts wreaks havoc on financial forecasts and planning. Firms need visibility on revenues and it is simply not possible if customers signed to long-term agreements seek to revise their terms, pay late or in the worst case scenario go bankrupt owning significant sums of money. It is important to remember the negative domino effect in the economy, which has acutely affected companies servicing and supplying the major players in the construction industry."

Creditsafe said that one reason firms in this sector have been left so vulnerable is that they are failing to run credit checks on prospective and existing customers to monitor their financial health. More than one in 10 (11%) firms leasing equipment to the construction industry never run credit checks to establish the likelihood of customers becoming insolvent and a further 36% of firms only run these checks sporadically.

Mr Knowles said, "It is disturbing that firms are still failing to take the most basic steps to protect themselves against the risk of a customer entering insolvency. Even when these checks are completed, it is vital if firms are signed to long run agreements with a regular payment schedule that checks are made on an ongoing basis to establish if they are still credit worthy. If a firm's credit rating falls dramatically the leasing company may wish to change payment terms or withdraw their service before losing money."