Growing Option: Financing from Within

When internally generated funds are available, only the fastest-growing companies seem inclined to turn to bank financing, a new survey finds.

As interest rates continued to edge higher in the fourth quarter, many private companies chose not to seek new bank financing, according to a new survey by PricewaterhouseCoopers.

PwC received responses from chief executive officers at 339 privately held companies with $5 to 150 million in annual revenues that the media had identified as the fastest-growing U.S. businesses during the last five years. The survey found that 87 percent of CEOs said they did not complete a new bank loan in the fourth quarter, compared with 83 percent a quarter earlier. In addition, 82 percent did not increase their credit availability.

Instead, for capital many relied on internally generated funds, thanks in part to improving gross margins. In the fourth quarter, 37 percent reported higher margins and 16 percent, lower margins; the net of 21 percent was more than double the 10 percent for the prior quarter.

“One might expect that bank financing would play a big role for these companies of extraordinary potential, but why go there and incur the cost if there are other options?” said Tracy Lefteroff, a PricewaterhouseCoopers global managing partner, in a press release. “Today, most are able to self-finance their expansion thanks to their healthy gross margins. But how long this can continue, given escalating energy costs, is anybody’s guess.”

As for the companies in the survey group that are borrowing, they average $43.3 million in revenues — nearly half again as much as the non-borrowers ($29.9 million). They expect to grow revenue 27.8 percent during the next 12 months, (compared with 21.4 percent). Fully 60 percent plan major new investments of capital this year (compared with 44 percent); considerably more of the borrowers expect to increase their budgets for new products, IT, advertising, sales promotion, and R&D.

The borrowers are using a combination of bank and self-financing because they’re expanding so rapidly, said Lefteroff; “they are wise to keep their options open by exploring nontraditional financing as well.”

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