Member Article

Is the lending market about to get more complicated – or an easier ride for the mid-market?

Benoit Gruber, VP Corporate Communication Sage Enterprise Market Europe & Sage ERP X3

This years’ Sage Enterprise Economic Impact Study showed exactly how important getting access to the cash to support growth and expansion is for mid-market companies across Europe: more than one in five companies find it a challenge. News of a potential change to one of the mid market’s biggest financiers may signal a significant shake-up in the way mid-market enterprises borrow – at a time when access to things like working capital.

The FT reported last month how General Electric was considering selling off GE Capital, one of the best-known lenders to mid-market business around. GE reportedly wants to return to its industrial heritage, and GE Capital has an AA+ rating from Standard & Poor’s, total assets of $500bn and 47,000 employees – so there’s likely to be no shortage of potential buyers.

GE’s CEO, Jeffrey R Immelt, said that the company would sell most of GE Capital over the next couple of years. When an industry giant like this faces such a mammoth change, then one thing is certain: its competitors are likely to face similar upheaval and disruption as they adapt – or are adapted – to a new market.

What does the future hold?

There’s no getting away from the value that GE Capital brings to the mid-market as a non-bank lender; the company can lay claim to lending to 40,000 business and 46,000 vehicle operators in the UK alone. In the US, it’s been designated a Systemically Important Financial Institution ever since 2010, when it was bailed out by the US Government to the tune of $130bn in loan guarantees.

What is important is to consider the sheer amount of liquidity that such a key player in lending to mid-market enterprises provides, and the impact of a sell-off on potential customers, as well as the outlook for mid-market enterprises looking to borrow. Bearing mind the huge importance of a healthy Mittelstand to the recovery and growth of economies across Europe, it’s vital companies continue to have access to borrowing, not just for their own good, but for the wider benefit of society.

GE Capital has a hand in financing invoicing, inventory, plant and machinery, cross-border and Pan-European trade, real estate, credit protection and trade financing. In effect, almost every aspect of a mid-market enterprise, from factories, offices and vehicle fleets through to extending financing to customers and buying equipment is affected by GE. That means that more than just a company’s ability to raise cash is at stake. The companies they buy from often provide finance on purchases, lease goods or equipment using finance and remain afloat or grow thanks to borrowed money.

When we looked at the economic impact of the mid market on European economies, one of the most significant issues for the businesses we talked to was access to finance – 22% of respondents said they had trouble securing finding. Bank loans were the most popular source of finance – but increasing regulation of banks has, in recent times, made them risk-averse. Access to lending through these channels can be difficult as a result. It’s not surprising that our study found that 74% would consider alternative finance options, including private equity and crowdfunding. Clearly, alternative sources of finance – and GE Capital is one of the most established players in this industry – are vital to a healthy mid-market.

A checklist

A sell-off could introduce uncertainty amongst business borrowers – but it’s also a wake-up call to all of us to check our loans and businesses thoroughly. If a lender we borrow from changes hands, the new owners can call in loans, modify rates and introduce all kinds of issues, with both positive and negative effects on borrowers. Those positive or negative effects tend to depend on what shape your company is in. A mid-market enterprise with appreciable assets, a healthy balance sheet and strong credit rating will probably have no trouble securing a line of credit. The flipside, unfortunately, is that all lenders are more cautious these days, and any business showing distress will be subject to greater scrutiny, less competitive borrowing rates – or even a kneejerk ‘no’ answer from many lenders.

This is, frankly, not great. Banks are risk averse these days, and there are plenty of businesses that are down on their luck after half a dozen years of recession – frankly, everyone’s suffered, and everyone’s raring to return to growth and get back to business again. The nightmarish outcome of a shakeup of the non-bank lending industry would be lenders only backing certainties, rather than investing in growth.

Yet the mid-market delivers huge opportunities for economies: according to Sage’s own Mid-Market Impact Report, these businesses will hire an extra 124,000 people a year across Europe every year until 2019, and grow at GVA at a rate of 3% to €1.2 trillion by 2019. Lenders might be, or become, risk-averse, but governments are also averse to limiting the growth engines of their economies.

A more nuanced, sympathetic and detailed understanding of the challenges some companies face will undoubtedly offer fantastic returns to lenders. When lenders become risk averse, they lose two things: a market for the goods they are selling, and the opportunity to enjoy the benefits of supporting companies that are overcoming adversity and rising above recession. And if the old non-bank lenders don’t do this, other, smart money will. New avenues for funding the mid market’s growth will open up if these – for any reason – narrow or close. The mid market’s too good an opportunity for lenders, too important to the wider economy.

This was posted in Bdaily's Members' News section by Sage (UK) Ltd .