Is There a Middle Market Liquidity Gap?

Middle market companies truly are the heart and soul of America. Many are family owned or private equity backed, and quite a few have foreign ownership as well.

They are not the core client base for large global banks, and in most cases are too big for smaller factoring and ABL lenders to serve.

It is very difficult to determine how many low to upper middle market companies there are in the U.S. If we go by employment numbers, there are approximately 30K. If we go by revenue, there is no good data source (remember many companies are private).  Last data source for companies by revenue claimed there were 20,805 firms between $50M to $100M (source: U.S. Census Bureau 2007). The last estimate based on employment size (using 100-499 employees, there were 83,423 firms, but many of those will be much smaller than $50M).  If we use purely 500+ employees, there are 18,215 firms (source: US Census 2015).  A better proxy would be employment between 300 to 5,000 employees, of which most recent Census found 27,854.

Still, many times these companies get depicted in, well, the middle of this graph. It is pretty misleading, as “spend” by a company does not equilibrate to size:

Middle market companies are serviced by an array of conventional (banks, factors, ABL) and non conventional (asset managers, insurers, specialty finance, etc.) financial firms. There are various ways to finance receivables, both general via revolving credit lines and specific, via techniques like factoring, SCF, invoice discounting with bank, bills of exchange finance facilities, etc.  Most middle market companies do not have access to securitizations to finance their receivable base (these arrangements can cover a very high proportion of receivables but are expensive to set up and maintain).

Asset‐based loans are usually written on receivables and inventory, and lenders screen the books extensively to decide which receivables are eligible for the “borrowing base”. Lenders look at areas such as receivable concentrations (more than 20% of sales with one customer is generally a concern), Government and foreign receivables, which often won’t qualify at all. The lender will also demand that borrowers provide robust weekly reporting on portfolio trends.

Most of the industry information around fintech and alternative finance models centers around how large companies have implemented some form of P2P, AP automation and or eProcurement solution with their supplier ecosystems, and combined that with some form of finance technique like SCF or DDM.

In recent research conducted by Global Business Intelligence, we found most middle market companies work with less than 4 supplier portals, making the process manageable today.

 

 

So how material is Early Pay Finance to middle market business in North America when dealing with their OEM and large enterprise buyers relative to existing liquidity and working capital options?

And as more early pay finance is offered to this segment, the key question is will it partially displace existing lending arrangements and lead to collateral erosion?

In our next post, we will address those questions.

In the meantime, if you would like a high level overview of the research, please feel free to contact me at dgustin@globalbanking.com

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