Study of mid-market business challenges lenders
by Jean Wojtowicz, President
Cambridge Capital Management Corporation
A study released by the Indiana Chamber of Commerce Foundation provides a profile of a potentially powerful economic engine: the state's mid-market companies. They are Indiana-owned for-profit firms with between $5 million and $100 million in annual sales.
There were 3,789 mid-market firms in Indiana in 2006, about 3 percent of all businesses. Yet here's the gee-whiz statistic: this 3 percent of the economy generates 30 percent of Indiana jobs (more than 386,000) and more than 40 percent of sales (over $55 billion)! And the top 20 percent of the mid-market companies experienced 53.5 percent growth while all 121,000 Indiana-based for-profit firms declined 1.2 percent decline.
Clearly, there's something cooking here! These powerhouse companies have already done much and they offer tremendous potential for more economic development. They are the types of firms that local economic developers should, and do, covet.
This rosy picture is somewhat dimmed by the realization that mid-market companies are small enough to be hammered by economic gale-force winds.
Local bankers can play important roles in helping mid-market firms realize their upside potential by explaining a full range of funding options when their mid-market customers ask for expansion financing.
Begin by being up on the latest news. For example, the SBA recently made its popular 504 loan program available to companies with a net worth of up to $8.5 million and as much as $3 million in annual earnings. Raising these ceilings from $7.5 million and $2.5 million allows more companies to take advantage of the 504’s generous features that were created to help small companies thrive.
In reviewing all sources of funding they can provide to borrowers, bankers should look carefully at their own institution’s strengths. Heavy market demands may equal greater pressure on available resources and force bankers to focus on the issues of liquidity and loan losses.
Liquidity is the total dollar value of cash and marketable securities divided by current liabilities. A bank’s liquidity is stronger if it can generate funds at a reasonable cost to fund loan growth and withdrawals of deposits. A question may arise if a bank is overly-reliant on funding sources such as brokered deposits and borrowed money that may not be available quickly in a pinch.
As for loan losses, they show up as an expense item on a bank's balance sheet. Some Indiana banks are seeing alarming growth in this area. One major bank's loan loss provision increased nearly 10-fold between and first and second quarters this year.
In an effort to balance their risk and still fund growth in their communities, lenders should urge borrowers to assist in their own financing by such time-tested internal devices as watching cash flow, streamlining where necessary and adding to personnel which it would be productive, delaying payments to vendors until the end of the payment cycle and raising prices or fees.
The State Chamber's study of mid-market companies invites a new consideration of how each of us – as business owners and lenders – can improve our services and knowledge of the state's current economic realities. Indiana and America remains an engine of economic opportunity if we work boldly to fine tune its potential.
By the ways, the study "Accelerating Growth in Indiana's Mid-Market Companies" is available on the State Chamber website or by calling the chamber for a copy.