Businesses’ debt to sales hits five-year high

February 25th, 2009, 6:00 am · 1 Comment · posted by Jan Norman, small-business columnist

Private companies have tripled the amount of debt they have relative to sales in the past five years, according to financial analyst Sageworks Inc.

Here are the data Sageworks pulled from financial reports of tens of thousands of privately owned businesses collected anonymously from financial professionals:

Source: Sageworks Inc.

Either businesses have been taking on more debt or sales have dropped. Or both.

Much as been made of the credit crunch and businesses’ inability to borrow. Check out this New York Times report. At the same time, the number of business loans has declined significantly.

But it’s likely that businesses already saddled with higher debt and slowing or declining sales aren’t in the market for loans.

“As the economy weakens, loan demand fades as fewer capital projects are planned and inventory
investment falls,” according to William Dunkelberg, chief economist for the National Federation of Independent Business. “Fewer loans are being made, but a substantial share of the decline is due to lower demand, not problems on the supply side.”

Just 8% of NFIB members surveyed in January reported problems obtaining financing they wanted, according to the NFIB’s Small Business Economic Trends Data.

The only part of the recently passed federal stimulus package directed toward smaller, privately owned companies encourages borrowing through Small Business Administration-guaranteed loan programs. That carrot might not work with heavily indebted companies.

Why is that an issue in a recession with rising unemployment? Small businesses accounts for about 67% of the net job growth each year. If small businesses aren’t growing, they’re not hiring.

Other business stories…