A patented working capital solution, ‘Sponsored Advance and Retention’ – developed by insurance major Santam and local specialist capital consulting firm Capital Breakthru Solutions business development director Wayne van Houten – has been designed to release working capital for construction contractors and subcontractors, says Santam bonds and guarantees head Clinton Spence.
This will support the development of projects and help to improve project efficiency and delivery. The risk-based working capital solution leverages a guarantee provided by Santam and is based on the economic merits and metrics of the construction project, as well as the reputation, capacity and proven capability of the contractors to provide immediate working capital on a project basis.
These products improve contractors’ liquidity and reduce business and financial risks in delivering projects on time, within scope and within budget, he says.
“The risks to projects in the current strained economic environment lead to few project employers being willing to provide advanced payments for contractors, which means that contractors and subcontractors must finance the first months of any project, including equipment and labour costs, from their own balance sheets.
“This is a risk to these construction companies and has led to encumbered balance sheets, as well as business closures,” says Spence.
Santam is able to leverage project funding for contractors from commercial and development banks by guaranteeing either a discounted advance or retention loan.
This enables the contractors to buy equipment and materials for the construction project. It also improves the roll-out of the project because there is no lag in payments to subcontractors and, therefore, fewer disruptions to construction, explains Van Houten.
“Commercial banks have become reluctant to support contractors in the local sector. Owing to strong competition for limited work, employers have also enjoyed competitive prices and have imposed onerous commercial terms of contract that have also caused significant constraints on the industry,” he says.
Additionally, extended payment terms heighten risks and the Sponsored Advance and Retention discounting products are fundamentally designed to mitigate unfavourable or negative project cash flows.
“Funding project cash flow deficit from the contractor’s in-house cash resources has an opportunity cost. Typically, projects should be self-funded on a standalone basis,” emphasises Van Houten.
The bridge-funding products support improved delivery of projects by all within the project supply chain and across all disciplines of engineering and specialist contractors, says Spence.
The structured finance solutions are also relevant to contract miners and the manufacturing industry to order supplies, as well as being available internationally and in all major foreign currencies, he adds.
Santam has a good international credit rating through its partnership with Sanlam Emerging Markets and has a presence in 32 countries in Africa, in addition to branches in India, South-East Asia, China, the UK, the US and Australia, notes Spence.