Rising real interest rates are pushing up the cost of commercial and industrial loans, making it harder for middle market businesses to meet payrolls and finance their expansion, according to the RSM US Middle Market Business Index (MMBI) Funding Special Report, presented by RSM US LLP (“RSM”).
The survey found that middle market firms are paying between 10.9% and 15.5% for financing, and these rates are pushing the risk premiums on loans close to double digits. Additionally, 34% of smaller middle market firms ($10 million to $50 million in revenue) have loans from commercial banks with rates below 5%, and 24% have loans with rates between 5% and 7%. The report explains that those loans will have to be rolled over in the coming years at higher rates, posing an additional threat to cash flow.
“The increasing cost of doing business through higher rates is leading to a greater sense of risk across the middle market and the economy,” said Joe Brusuelas, chief economist with RSM US LLP. “One of the particular challenges during this cycle is that as inflation eases, real interest rates increase. That creates a situation in which commercial and industrial loans are much more expensive, on top of tighter lending by commercial banks.”
Firms Look to New Financing Sources and Face Higher Premiums
The survey results show that middle market firms are casting a wider net for financing. Fifty-six percent of organizations in the survey sought traditional bank lending over the previous 12 months, down from 74% in a similar RSM survey in 2015. Additionally, 53% of the surveyed executives indicated they would be less likely to obtain financing from a commercial bank than in the past.
When asked about where they are getting funding, 36% of middle market executives said they have turned to the shadow banking market. Thirty-three percent reported using equity sources such as private equity, 30% said digital banking and financing sources, 29% have used government lending and 60%…
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