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The Health of Private Companies As We Head Into Sequestration
By Mary Ellen Biery, March 5, 2013
As the deadline for averting major government spending cuts has arrived, several reports have noted that the so-called sequestration will mean a cut in U.S. Small Business Administration loan guarantees that could help small businesses access $902 million in capital.
One bright spot in the lending picture may be that private companies appear to be better positioned to borrow than they were a year ago, which could help improve their prospects if they seek non-government loans, according to data from Sageworks Inc., a financial information company.
Sageworks this week released a monthly report on the state of privately held U.S. companies, showing that the average company's likelihood of credit default has declined over the last year. And private companies have continued to increase sales and improve their net margins in the period ending January 2013, the report said.
"While the sequester's impact on businesses remains to be seen, the good news is that private companies are in pretty good shape now," said Sageworks analyst Libby Bierman. "Sales growth is strong, profit margins are exceeding pre-recession levels, and credit risk appears to be improving."
From that somewhat strong position, these companies can start to plan once they know how the sequester will impact them. We'll continue to monitor the performance of private companies throughout the year."
According to financial statements filed in the six months ended January 2013, privately held companies saw average annual sales growth of 9 percent and net profit margins of 8.1 percent. The sales growth is slightly lower than the 10.2 percent average annual growth for statements filed in the six months ended January 2012, but net profit margin is better than the 4.6 percent margin among statements in that period. Earlier research by Sageworks indicated that private U.S. companies continue to see the highest per-employee sales and profits in years.
Credit-related metrics for private companies are also improved over a year ago, according to Sageworks data. The average private company's likelihood of default is lower and debt-to-EBITDA, a measure of financial liquidity, is also below the period a year earlier, according to early estimates based on financial statements from 2012 and 2011.
The financial performance of private companies and their ability to borrow is critical to the U.S. economy. Private companies drive over 50 percent of GDP and 65 percent of new job creation in the U.S. Not all privately held companies are small, but borrowing by small businesses alone amounts to about $1 trillion, according to the SBA.
Some lenders have noted that the SBA administers less than 2 percent of all small-business loans, leaving lots of room for non-government loans. But getting a bank loan hasn't been easy.
Banks' commercial and industrial loans of less than $1 million to U.S. firms (a proxy for loans to small businesses) are still about 16 percent lower than in 2008, and they grew more slowly last year than loans of all sizes, according to FDIC statistics. Banks have shown some signs of loosening lending standards in recent months, but industry experts say for now, it's only the healthiest companies that are able to get a bank loan. Others warn that any crimp in access to lending will exacerbate job creators' ability to grow.
For the full story featuring Sageworks visit The Huffington Post - The Health of Private Companies As We Head Into Sequestration.