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Supply chain finance in construction

Supply Chain Finance in Construction

Construction financial processes historically have posed significant cash flow and working capital challenges for subcontractors, but a growing number of forward-looking general contractors are working to alleviate those pressures for their project partners.

In the intervening weeks - or even months - they still must fund expenses such as labor and materials for completed and ongoing work. Taken together, these factors can create cash flow difficulties that can dramatically impact working capital management for subcontractors. Such risks tend to increase in booming construction markets, as subcontractors may take on more work than they can handle, which can exacerbate cash flow struggles.

SCF techniques, which are widely used in a variety of industries, are now gaining ground in construction as well. Turner’s program leverages Oracle Textura payment management technology and a supply chain financing relationship to facilitate faster and more predictable payments to its participating subcontractors.

In practice, SCF involves the use of financial techniques that help buyers to maintain or enhance their working capital position while, at the same time, enabling suppliers to improve their working capital and cash flow through accelerated payments. Unlike traditional, bank-based small-business lending, which relies on the creditworthiness of SMEs like subcontractors, an SCF program leverages the credit position of the larger buying entities. That, however, is changing as a result of technology that standardizes and automates the invoicing and payment process, increasing both efficiency and transparency and removing key risks.

All in all, SCF programs have the potential to help subcontractors access faster, more predictable payments, reducing their reliance on high-cost financing as well as improving cash flow and potentially strengthening balance sheets.

In tandem, contractors gain the benefit of stronger subcontractor relationships, competitive advantages and reduced risk of subcontractor default - which runs the risk of elevating project costs up to three times the originally forecast scope of work for a win-win on both sides.

As such, technology-enabled SCF programs should be considered a key tool to optimize working capital and position organizations for success across the supply chain.

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