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Banks Loans Not High on List for Fast-Growth Companies

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May 26, 2005--For the second quarter in a row, only 15% of fast-growth businesses reported new loans during the first quarter, according to a recent Trendsetter Barometer Survey conducted by PriceWaterhouseCoopers.

Concurrent with this low but steady activity level are a decreased number of companies planning major capital investments and ever-increasing bank interest rates.

Of the 341 CEOs surveyed, 41% expressed plans for new capital investments within the next 12 months, down from 48% in the previous quarter.

The mean bank interest rate reported by new borrowers was 6.16%, up from 5.73% in the previous quarter and 4.60% one year ago.

While most obvious, these are not the only factors influencing the slowdown in bank loans. The percentage of fast-growth companies financing through bank activity remained between 15% and 19% in fiscal year 2004--near an all-time low, said Pete Collins, the survey director.

"The figure we're seeing is the base level of bank funding that fast-growth companies require," Collins said.

Two additional factors can account for the weakened demand for bank loans: the ability of firms to self-fund as they see increased cash flows due to a recovering economy, and new legislations that offer companies tax-based incentives to seek funds elsewhere. As a result, many companies are able to meet their financing needs internally, said Keith Leggett, senior economist for the American Banking Association.

The recent trend of depressed loan demand that governed the past five quarters may not necessarily suggest a permanent pattern for the future, however. As fast-growth companies' internal cash flows begin to lag behind their need for funds, they will once again start borrowing more from the banks, even if interest rates continue to increase.

"As long as the economy is relatively healthy, and there is a robust demand for these companies' products, they will continue to grow and seek external funding," Leggett said.

Last updated: May 25, 2005




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