In the wake of the Silicon Valley Bank and First Republic Bank failures, a looming credit crisis poses a real threat to middle-market business growth.
Michigan’s middle-market businesses are a remarkable force powering the economy. With revenue ranging from $10 million to $1 billion, these companies employ 30 percent of southeast Michigan’s workforce. They’ve also been responsible for more than 50 percent of national job growth since the Great Recession, even though they represent 1 percent of all American businesses.
The economic impact of these job-creators is clear: Michigan’s 3.7 percent unemployment rate is near a record low, trending with the national average for the first time in decades.
Tough Times
While Michigan’s middle-market businesses continue to power the economy, a gap is growing between recent positive economic headlines and the realities these companies face.
I often interact with middle-market entrepreneurs across the country. Despite recent discussions about an economic “soft landing,” I frequently hear a different narrative from business owners, suggesting the broader economy is deteriorating more than many people realize.
Emerging data is showing this, as well. The National Center for the Middle Market recently reported a 75 percent increase in middle-market bankruptcies since June 2020. Mid-market businesses continue to be confronted with myriad challenges including skyrocketing costs, disruptions in supply chains, and staffing shortages.
If these headwinds weren’t enough, the failure of Silicon Valley Bank and First Republic Bank have posed the biggest test yet for middle-market firms: a rapidly unfolding credit crisis.
A Banking Crisis
The recent fallout from the Silicon Valley and First Republic collapses couldn’t have come at a worse time. The past two years have encompassed one of the most challenging banking environments in decades. Even before this crisis, banks were contending with skyrocketing interest rates, growing loan losses, and a yield curve inversion only comparable to the early 1980s.
The scale of SVB and First Republic’s failures, bigger than the combined losses of the top 25 bank failures in 2008, has triggered the most significant drop in corporate lending since records began being kept in 1973.
This contraction of credit has proven more severe than the fallout from the OPEC oil crisis, the dot-com crash, and even the shock of 9/11. And it hasn’t stopped there. In May, the Federal Reserve reported half of all U.S. banks have tightened lending standards, thereby increasing barriers to mid-sized businesses in need of accessible and affordable financing.
Looking ahead, the outlook is uncertain. Federal regulators are considering additional rules on banks with deposits over $100 million. This will likely lead to stricter underwriting rules and capital requirements, further constraining lending. The impact will be felt most by regional banks, which will be required to lend less at higher interest rates.
A Path Forward
Despite the uncertainty and challenges ahead, Michigan’s middle-market companies have a proven track record of resilience and adaptation. As they navigate this economic landscape, it’s important that we promote strategies to support and sustain Michigan’s economic growth. Here are some considerations for the business community moving forward.
Responsible Bank Regulatory Reform: As federal policymakers consider rewriting the rules on regional banks holding more than $100 billion in deposits, it’s crucial any changes consider regional banks’ outsized role in funding middle-market success. This is especially important given mid-sized companies are often too large to be eligible for U.S. Small Business Administration (SBA) support, and too small to access Wall Street financing. They rely heavily on regional banks for everything from meeting payroll to acquiring a competitor.
Alternative Financing Routes: Encouraging policies that support alternative financing options such as private credit, growth capital, business development companies, and non-banking financial institutions is imperative as traditional banking avenues constrict. Entrepreneurs should also consider the services of reputable M&A advisers to assist in finding financing to meet their strategic objectives.
Greater Policy Advocacy: Policymakers and community leaders must be educated on the significant contributions of mid-market businesses. Governments at all levels should partner with these employment engines to reduce needless regulations, provide additional tax benefits, increase accessibility to low-interest loan programs, and create more innovation grants focused on growth.
Promoting Leadership: Michigan consistently ranks among the top states for middle-market businesses in the country. Highlighting these companies, their leaders, and their significant economic impact is essential. Promoting this important part of the local economy not only sustains our current momentum, but also serves to attract new middle-market ventures to our state.
Michigan’s middle-market businesses have weathered hard times before, and they’ll do it again. The road ahead won’t be easy, so it’s more important than ever to come together and advocate for these important economic leaders. After all, if the Michigan middle-market community continues to win, so will we.
