Small businesses continue to rely mostly on internal cash flow to finance higher capital spending, keeping a lid on borrowing, according to a just-released survey.

Conducted in April by the National Federation of Independent Business, the survey found that just 30% of respondents are borrowing on a regular basis - meaning at least once a quarter. That's down from 33% in March.

Based in Washington, D.C., the federation represents about 600,000 small businesses nationwide.

Surge in Spending

Just as low interest rates failed to stimulate higher capital spending earlier in the economic recovery, the spike in rates this year isn't inhibiting the current surge in spending on vehicles, equipment, and expansion programs, according to the survey.

For the moment, small businesses are "probably fairly insensitive" to interest rates, because their cash flow is strong and the returns on their capital investments look pretty good, said William Dunkelberg, the federation's chief economist. He is also dean of the business school at Temple University in Philadelphia.

Mr. Dunkelberg expressed indifference about the Federal Reserve Board's credit-tightening moves. "Right now, it doesn't matter too much," he said.

On Tuesday, the Fed raised its target rate for federal funds for the fourth time since February, to 4.25% from 3.75%. The discount rate was increased to 3.5% from 3%.

Sluggish borrowing on the part of federation-member firms stands in contrast to a healthy increase in bank holdings of commercial and industrial loans, which are up $19 billion so far this year, to a little over $600 billion.

Mr. Dunkelberg said the increase in C&I loans probably reflects an increase in borrowing by larger manufacturing firms, particularly those in the Midwest.

Borrowing Costs Unchanged

The percentage of firms reporting in April that they were borrowing on a regular basis was the lowest it has been in the 20-year history of the survey.

Borrowing costs, meanwhile, remained unchanged in April, at an average of 8.3%, seasonally adjusted.

Federation members borrow mainly from banks, and over 40% of their loans are tied to the prime rate.

While the prime rate has been rising this year, in response to higher short-term rates, banks have been under competitive pressure to cut the spreads over their base lending rates.

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