It is a buyers’ market right now for real estate, and the same holds true for middle market companies.
“At most banks, the middle market portfolio is the heart of what drives the commercial banking earnings,” says Steve Cobain, senior vice president and middle market manager at First Commonwealth Bank.
As part of such a crucial economic sector, middle market businesses have the power to choose a bank that suits their needs.
“Some banks differentiate by being very easy to deal with, making their credit terms very loose and their pricing extremely inexpensive,” Cobain says. “Other banks accentuate the fact that they are a full-service provider, are very consultative, work with clients, understand the business from the owner’s perspective and are going to be a very dependable financial partner for the client, rather than just compete on price alone.”
Smart Business spoke with Cobain about the general market conditions in middle market lending and how businesses can take full advantage of them.
What is the definition of a middle market company?
There are multiple definitions, but the most prevalent is that a middle market company has sales that range in annual revenue from $20 million to $500 million. They are usually privately owned — a large number of them are family owned — and have rapid growth. There are a high number of companies that fit that category; in Pennsylvania, there are probably 6,000 companies fitting that definition.
What are the typical financial needs of middle market companies?
The middle market is one of the more complicated sectors, where companies need a full array of banking products. There’s a need for credit, treasury management services and other products, such as manufacturing companies that need trade letters of credit for both the sale of their goods and the import of raw materials.
There is no segment of the economy that the middle market doesn’t touch, but there are different underwriting standards, credit structures and treasury management products depending upon the business. For example, a service business might not have many assets for collateral, so banks take a harder look at the cash flow that a company can generate, while a manufacturing company uses inventory, receivables, equipment and real estate to secure credit.
In addition, there are a number of factors that come into play for middle market companies trying to secure a loan agreement, such as whether the owner needs to personally guarantee the company’s debt, the number of times a company has to cover its debt service, how much leverage the bank will allow a company and the types of advance rates available for lines of credit based upon inventories and receivables
What is the current situation for middle market lending, and what does this mean for businesses?
From a small community bank all the way through to the largest banks in the country, there are dedicated business practices for the middle market. From a bank’s perspective, it is one of the most profitable of the corporate sectors. Because businesses are reliant on their primary bank for the bulk of their services, there are a lot of cross-sell opportunities, and middle market companies are typically loyal.
On the whole, there’s still a perception that banks are not actively lending money, but that’s not the case for the middle market. If you’re a strong middle market company that is profitable and financially stable, you are going to find that virtually every bank in your geographic area will be trying to attract you as a client. Other middle market companies might be going through working capital challenges because growth is rapid and you haven’t fully demonstrated your profitability yet, so you should find a bank that can be a true financial partner.
What should middle market companies look for in a banking partner?
Look for a bank that will invest the time and effort to understand your business and support you through your working capital cycle. Your banker needs to be able to see your business from your perspective, as an owner. Many middle market companies are privately held with little regulation, so look for a bank that can help you find a balance between distributing excess capital back to yourself and keeping the company’s balance sheet strong and stable for the foreseeable future.
Middle market employers should expect a high level of service from their banking partner. Typically, the bank designs a portfolio of products, assigns a relationship officer who meets with the company at least four or five times a year and makes sure the company is aware of all the products available. In addition, the employers themselves are put into a private banking group for personal banking needs.
How can businesses determine the right time to switch to a different middle market lender?
In the early stages of a middle market company, with sales of $20 million to $30 million, the business can be with a smaller community bank. However, as revenue grows, you might need a bank with a higher hold limit.
It’s important for a middle market employer to know how much credit any one bank can provide and work with banks to ensure there is enough financial backing to accommodate anticipated growth. Therefore, in a period of rapid growth, it might be necessary to change or add banks to your portfolio.
Also consider switching if you’re not getting some combination of a high level of service, a good understanding of the business, solid consultative advice, and fair and competitive pricing.
Insights Banking & Finance is brought to you by First Commonwealth Bank.