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Trendsetter Barometer: Strengthening Margins Give Fast-Growth Companies Financing Independence

Flush with improving margins, fast-growth companies are becoming more financially secure says PricewaterhouseCoopers. With these companies more profitable, their CEOs may feel less edgy, and more comfortable about making new financial commitments.

Flush with improving margins, fast-growth companies are becoming more financially secure—and more inclined to self-financing than to new bank loans. Those that have recently completed new financings, however, appeared to do so because they are on a faster, more-demanding track than their colleagues, and beyond the ability to completely self-finance.

A Broad Strengthening of Gross Margins

• 34 percent reported higher margins in the second quarter, up from 30 percent in the prior quarter—matching highs in the second quarter of 1999 and 2000, when the economy was booming.
• In contrast, only 15 percent reported shrinking margins, fewer than in any second quarter over the past five years.

“It is encouraging to see so many of these businesses with improving margins,” said Tracy Lefteroff, global private equity leader for PricewaterhouseCoopers. “With these companies more profitable, their CEOs may feel less edgy, and more comfortable about making new financial commitments. It’s a big plus for the economy.”

Fewer Worried About Scarcity of Capital or Decreasing Margins

• Only 21 percent cited lack of capital for investment as a prospective barrier to growth over the next 12 months—off from 24 percent in the prior quarter—and the fewest since the fourth quarter of 1999.
• Only 29 percent reported that decreasing margins could be a barrier, the fewest since the fourth quarter of 2000.

“Because these CEOs have been able to properly price their products and grow their margins, they have become more secure about operating in today’s economy,” said Lefteroff. “They are finding they can be more self reliant when it comes to financing new initiatives.”

Few Sought and Obtained New Financing

• Only 16 percent applied, and 15 percent received new bank loans in the second quarter, down from 20 percent and 19 percent, respectively, in the first.
• Only 18 percent increased their credit availability, off from 21 percent. The average credit increase amounted to 7.3 percent, compared to 11.3 percent in the prior quarter.

“Fewer surveyed companies sought and obtained new bank financing in the second quarter, despite rock-bottom interest rates and the opportunity to borrow before an impending 25 basis-point increase by the Federal Reserve,” said Lefteroff. “This is further evidence of the capability these companies are developing to self-finance.”

New Borrowers Growing Faster, Facing Greater Demands

CEOs that did borrow in the second quarter appear to have more-extensive expansion plans than their colleagues that didn’t:

• They expect stronger revenue growth over the next 12 months—26.4 percent, versus 19.9 percent for non-borrowers, or 33 percent higher.
• They also had greater revenue growth over the past five years—421 percent, versus 335 percent respectively, or 26 percent higher.
• More borrowers also expect to make major new investments over the next 12 months: 58 percent, versus 42 percent of non-borrowers. Increased spending plans are notably higher for: new product/service development, cited by 52 percent of borrowers (14 points higher than non-borrowers); sales promotion, 44 percent (10 points higher); and research & development, 27 percent (11 points higher).
• More borrowers are also engaged in international sales—59 percent versus 42 percent.

“There is clearly a limit to self-financing,” said Lefteroff. “New borrowers, because of their aggressive expansion plans, have reached that limit, and are supplementing with loans that remain a bargain, despite recent rate increases.”

If you have a question about this Trendsetter Barometer survey, please contact Pete Collins, survey director and publisher, at 646-394-4496 or e-mail to: pete.collins@us.pwc.com

PricewaterhouseCoopers’ “Trendsetter Barometer” interviewed CEOs of 364 privately-held product and service companies identified in the media as the fastest growing U.S. businesses over the last five years. The surveyed companies range in size from approximately $5 million to $150 million in revenue/sales.

PricewaterhouseCoopers “Trendsetter Barometer” is developed and compiled with assistance from the opinion and economic research firm of BSI Global Research, Inc.