Executives Blame Economy, Not Banks, for Spending Freeze, Finds Research

Small businesses and middle market companies put the brakes on growth-oriented investments last year and are sending mixed signals about their intentions for the year ahead. The owners and managers of these firms are not blaming this lack of investment activity on the absence of credit – it’s the economy they say is holding them back.

Research from Greenwich Associates reveals that more than one-third of middle market companies and 45% of small businesses reduced their level of capital expenditures over the last year. While the share of these companies planning to make capital investments in equipment or technology or hire new employees is now inching upwards, most companies intend to keep overall capital expenditures flat at current low levels in the coming year, and some predict further reductions in 2011.

However, less than 5% of middle market companies and fewer than 15% of small businesses attribute their reduced capital expenditures (capex) to an inability to obtain affordable credit. Instead, a large majority of both groups cites a persistent lack of demand and uncertainty about the economy as the main reasons for putting off business investments.

“Credit policies are tougher for middle market companies and truly challenging for many small businesses,” said Greenwich Associates consultant Chris McDonnell. “But in both segments, our research suggests that the prolonged economic slump has reached the point at which many companies have decided to keep new investments on hold – regardless of the availability of credit.”

Capex: Cutbacks in 2010, Mixed Signals for 2011

From 8 October to 25 October 2010, Greenwich Associates surveyed 198 small businesses and 170 middle market companies about the state of their businesses, spending decisions, bank relationships, and the economy. The survey results are not all bad news. Approximately 30% of small businesses intend to hire one or more new employees in the next year, up from just 22% in 2009. Thirty-five percent of middle market companies expect to hire in the next 12 months, up from 21% last year.

The results also show increasing demand among small businesses and – to an even greater extent – among middle market companies for capital equipment and information technology. This increasing activity does not signal an across-the-board increase in capex, however. While a quarter of middle market companies plan to increase their levels of capital expenditures in the coming year, 16% plan to cut capex spending in 2011.

Small businesses are far less optimistic. Approximately half of small businesses plan to keep capex at current levels for the next 12 months. The remainder of small businesses are more or less evenly divided, with approximately 22% reporting plans to increase capex spending and about the same share planning reductions. “Of course, for many of these small businesses, current capex levels might already be close to zero,” said Greenwich Associates consultant Don Raftery.

Reasons for Capex Reductions

Less than 5% of middle market companies planning 2011 cuts to capital spending cite shortages of bank credit as a reason for the reductions. “None of these middle market companies blamed their decision to cut capex on the costs of bank credit, and only about 4% attributed their pull-back to any concerns about their ability to access bank credit,” said Greenwich Associates consultant Pete Garrison.

Middle market companies cite three main reasons for cutting back on capex in the coming year:

  • No current need for spending at past levels (cited by 30% of companies planning capex reductions).
  • Uncertainty about the future of the economy (cited by 30%).
  • Conscious effort to cut back on spending and save money (cited by 26%).

Even among small businesses, only about 13% of companies planning capex reductions blame credit conditions for this decision.

Companies Tap Cash Reserves to Fund Investment

In 2009, a majority of small businesses planning to increase capital spending expected to fund these new investments with a mix of cash, lines of bank credit and term loans. Since then, small businesses have gotten the message: since so few are getting bank financing, plan on tapping much deeper into cash reserves to fund any investments.

Approximately 60% of small businesses that plan to increase capital expenditures in the coming year plan to pay for these investments with cash or retained earnings. That share is up from 53% in 2009. Meanwhile, the share of small businesses planning to fund new capital investments with bank lines of credit dropped to just 40% in 2010 from 53% in 2009, and the share planning to use term loans fell to 26% from 53%. In the middle market, 70% of companies planning increases in capital spending in the coming year plan to fund the investments with cash or retained earnings. This is up from the 56% of companies planning to fund new investments with cash last year.

Meanwhile, fewer middle market companies are planning to fund new capital investments with lines of credit, term loans or other forms of external financing. “Among middle market companies, there are several factors at play,” said Garrison. “At the top end of the middle market, companies with strong credit ratings and balance sheets have ample access to bank credit – but many of these companies have also built up significant cash reserves that they plan on putting to work through capital investments. At the lower end of the market, companies have less cash and possibly more demand for bank credit, but their weaker financial position makes it difficult to qualify for loans under banks’ tougher new credit policies.”


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