Middle Market Lending Overview

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Middle market lending

Middle market companies are larger than small businesses but smaller than big companies. They account for roughly one-third of the United States economy and are crucial to driving economic growth. Middle market companies often find themselves needing capital to purchase inventory or expand their operations, causing them to borrow money from middle market lenders.

What is Middle Market Lending?

Middle market lending, often referred to as commercial banking, is a type of banking that focuses on lending to companies with annual revenues ranging from $5 million to $1 billion. Companies need capital to pursue growth initiatives while banks profit from interest income; it is a mutually beneficial relationship.

Examples of Middle Market Companies

Although middle market companies account for one-third of the United states economy, these companies are often times not very well known. Examples include a regional plumbing wholesaler, a manufacturing company for a specific airplane part, or a regional construction company that specializes in building/repairing bridges.

Types of Loans

  • Revolving Line of Credit – A line of credit is similar to a credit card. Instead of receiving loan funds in a lump sum, you can draw funds as needed. Businesses will draw on a line of credit to purchase inventory and then will pay the balance when the inventory is sold, and then repeat the process. The most attractive aspect of a line of credit is that monthly payments are interest only.

  • Term Loan – A commercial term loan is a loan with a set term, usually between one to five years, and a consistent repayment schedule. Businesses will use a term loan to purchase equipment, vehicles, or even acquire other companies.

  • Owner-Occupied Real Estate Mortgage – When a company wants to acquire real estate from which they will operate from, or if they wan to expand their current facility, they will obtain real estate mortgage.

Career Paths

The typical commercial banking career path often begins with a more analytical role while senior positions often involve sales. The most common career path is as follows:

  • Entry Level – Commercial Credit Analyst
  • Mid Level – Commercial Portfolio Manager
  • Senior Level – Commercial Relationship Manager

Credit analysts will underwrite loan requests by analyzing financial statements and determining a company’s ability to repay a loan. Portfolio managers have a lot of the same duties as credit analysts, but have a lot more responsibility as they manage a large portfolio of middle market loans. Relationship managers are the sales people at a bank. They are the main point of contact for a company and often carry most of the responsibility when it comes to a relationship.

Careers in commercial banking can be lucrative, which is why job placement can be competitive and many aspiring bankers choose to complete a certification in addition to a degree in order to stand out.

Future of Middle Market Lending

Similar to many asset classes, middle market lending was negatively impacted by the COVID-19 pandemic; however, Government programs such as the Paycheck Protection Program (PPP) and the Employee Retention Tax Credit provided relief for middle market firms.

Middle market lending activity tends to increase in times of economic growth and decrease in recessionary periods. It is also fair to say that competition from larger firms is the largest threat to businesses in this segment.

Despite heavy competition and the risk of a recession, the future of middle market lending is bright, as medium to large sized businesses will likely need to borrow money for the foreseeable future.

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