Middle-market firms face bank funding gap, i2c executive says

U.S. companies with about $1 million to $50 million in annual revenue can face a financing gap as they move beyond small-business banking but remain below the scale typically served by commercial banking, according to Dan Hanks, senior vice president and global head of product management at i2c. In an interview with PYMNTS, Hanks said the issue can slow expansion for firms whose sales, customers and markets are growing faster than their banking support.

Hanks said these companies are often held back by cash-flow constraints rather than lack of demand. He described the emerging middle market as fast growing, adding that the firms “don’t have a growth problem” but can have a problem getting banks to support that growth.

The pressure point, according to Hanks, is the move from small-business products to commercial banking. Many banks organize those areas separately, with distinct underwriting standards, product teams and technology systems. That separation can leave a company in transition without a clear fit inside the institution that already holds its relationship.

Two credit models leave a gap

Small-business lending often relies heavily on the owner’s personal credit profile, Hanks said. Commercial banking uses a different framework, including corporate financial statements, operating performance and cash-flow analysis.

Companies between those categories may need more sophisticated credit than a small-business product can provide, while still lacking the scale or documentation expected in a commercial relationship. Hanks said founders in that position may rely on personal credit cards or personal loans to keep the business moving.

That workaround can create a longer-term problem. If business spending is carried on personal credit, the activity may not become part of the company’s own commercial credit record. Future lenders assessing the firm may therefore see less evidence of operating history than the business has generated in practice.

Hanks said some fast-growing firms report that they have adequate access to credit, yet still miss opportunities because capital is not available in the right format or at the right time. He said conventional underwriting models are more comfortable with stable patterns than with companies expanding at annual rates of 30%, 40% or 50%.

Data and systems become part of the credit decision

Hanks said banks do not need to address the issue only by approving more loans. He argued that institutions could make better use of customer information they already hold, provided that data can be shared across internal divisions.

In many cases, the obstacle is operational. Hanks said banks often operate legacy technology platforms that have been in place for decades and may not be flexible or quick enough to serve companies in the middle-market transition.

Disconnected systems can make it harder for a bank to coordinate underwriting, account management and product delivery across the small-business and commercial divide. A lender may know the customer well, but still require the business to begin again with a new team once it reaches another stage of growth.

Hanks said middle-market companies want financial partners that can grow with them. He pointed to the shift from tools such as QuickBooks and spreadsheets to enterprise resource planning systems as one sign that a company’s financial and operating needs are becoming more complex.

For banks, Hanks framed the opportunity in both offensive and defensive terms. Institutions that can connect their data, products and relationship teams may retain companies as they expand. Those that cannot, he said, risk seeing those customers move to another provider.

This story draws on original reporting from PYMNTS.