Despite growing confidence in future sales, UK construction SMEs are facing significant financial headwinds, with access to external finance tightening just as cost pressures and bad debt levels rise, according to new research from Bibby Financial Services (BFS).
The report, based on BFS’s Q1 2025 SME Confidence Tracker, reveals a mixed picture for small and medium-sized firms in the construction sector. While 67% of construction SMEs expect sales to rise over the next 12 months — up from 57% a year ago — more than half (51%) say it has become harder to secure external finance, the highest proportion of any sector surveyed.
This access-to-finance gap comes at a time when construction SMEs are dealing with persistently high costs for materials and labour, complex contract terms, and a growing burden of bad debt. BFS data shows these firms have written off an average of over £23,000 in the past year, and nearly one-third (29%) report insufficient cashflow to manage day-to-day operations.
Rising costs, shrinking margins
The impact of elevated raw material prices, particularly timber and concrete, has been especially acute, with 72% of SMEs saying these pressures are directly eroding profitability. Small firms, often less able to hedge or absorb cost spikes, are also more exposed to supply chain disruption and inflation than their larger counterparts.
Insolvency rates are rising as a result. Nearly one in five (18.1%) of all business insolvencies in England and Wales in March were from the construction sector, according to data from the Building Cost Information Service (BCIS).
Finance harder to come by
Despite the Government’s Industrial Strategy pledging £100 billion in capital investment and a commitment to build 1.5 million homes over the next five years, smaller construction firms are sceptical. Four in ten (40%) doubt the Government’s ability to support them effectively, with many concerned that the lion’s share of benefits will flow to large main contractors.
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By GlobalDataThe situation is compounded by increasingly difficult access to finance. While the Government has identified improving SME finance as a key policy goal, BFS’s research suggests the reality on the ground is diverging. Only 32% of construction SMEs say they use finance for day-to-day operations, but for many, that finance is now harder to obtain.
“The Government’s commitment to invest in the construction sector may explain rising optimism,” said Derek Ryan, UK Managing Director at BFS. “However, inflation, rising costs and restricted access to finance are squeezing margins and exposing small firms to greater insolvency risk. To unlock the full potential of the construction pipeline, SMEs must be given equitable access to opportunities and funding.”
Contract complexity adds to pressure
BFS’s report also points to contractual dynamics that disproportionately impact smaller firms. Nearly half (48%) of construction SMEs find contracts difficult to understand, a figure that climbs to 56% among micro-firms with fewer than 10 employees. These businesses are often locked into rigid payment terms and report limited ability to negotiate, only 26% say they can influence contract terms, compared to 58% of larger small firms (10–50 employees).
Industry calls for action
The Federation of Master Builders echoed the call for stronger SME support, warning that unless access to finance, skills and planning is improved, the sector’s smallest firms will continue to face a systemic disadvantage.
“Small builders are showing remarkable resilience and optimism, but they face mounting challenges,” said Brian Berry, Chief Executive of the FMB. “Access to finance is harder than ever, and planning policy too often favours large developers. If the Government wants to build more homes and boost local economies, it must ensure that SMEs aren’t left behind.”
As construction continues to be a cornerstone of the UK’s economic recovery strategy, the message from industry and finance alike is clear: if SMEs are to help deliver the Government’s growth agenda, greater financial accessibility and structural reforms must be prioritised.
