The cost of debt is higher for privately held companies and the difference may be as much as 1% in interest, according to an article published by the INSEAD business school.
Apart from mandatory disclosures which make publicly traded companies more transparent, there are two other reasons for this.
- Publicly traded companies have access to the equity market
- Banks are less keen to lend money to private companies because they have a higher default rate than that of publicly traded companies
Access to the equity market
This is about liquidity. Publicly traded companies can acquire liquidity by offering stocks. Even when the price is falling, these companies can always issue more stocks and raise cash that way. Privately held companies simply cannot do this and rely on their owners injecting more cash.
When the economy is declining, publicly traded firms can still issue stocks. Owners of private companies, on the other hand, are less likely to invest. With a recession underway, publicly traded companies have better access to cash.
Default rate
The authors of the INSEAD business school article also discovered that the default rate of privately owned companies was some 40% higher than that of publicly traded companies.
Conservative reporting can decrease the cost of debt
What can help a privately held company is to find a large investment management company that would provide it with financial backing. It can also adopt a conservative style of reporting. Given high quality reports, it is quite possible the market will find the company more trustworthy.
Conservative reporting is a positive signal to the debt market and, if combined with voluntary disclosures, it can reduce the cost of debt.
-jk-