The Future of Financing for Main Street and the Lower Middle Market

The financial landscape continues to undergo a major transformation as capital moves into private debt markets. Factors include the aftermath of the 2008 Great Financial Crisis, shifts in global economic policy, and domestic banking crises like Silicon Valley Bank. Recent tariff policy has introduced many uncertainties for supply chains and financial dealmaking but the overall shift to private markets is undeniable. This can be beneficial for America in many ways, allowing capital from diverse institutional investors to make its way down-market into alternative financing structures, expanding access to capital beyond traditional banking.

Overview

The small and lower middle market is a sector of the economy that stands to gain significantly from these changes. This sector, comprised of businesses generating up to $50 million in annual revenue, is widely recognized as the backbone of our economy, representing more than 43% of America’s GDP. This diverse market includes businesses ranging from restaurants on Main Street to budding software companies. However, for businesses in this vital sector, a major gap persists in both access to capital and education on how to effectively implement it into their operations.

Lower Middle Market

Private credit and private equity firms invest directly into the lower middle market, seeking the high transaction volume, vast addressable market value and higher yields. Problems remain with addressing this market – a big one being financial literacy. An owner of a manufacturing company knows the ins and outs of their business from an operational standpoint but sometimes may see debt as a four letter word, a negative connotation, not a tool that can be used to grow and multiply their business.

Main Street

The challenges discussed in this post are most visible in the small market – businesses generating up to $10 million in annual revenues. Companies in this sector have had an increasingly tough time accessing financing. Many are not asset intensive and require less traditional forms of funding like revenue-based financing (RBF). RBF allows businesses to access capital primarily based on their monthly revenues in an expedited manner. However, quicker access to capital typically comes at a higher cost, so educating these businesses on how to effectively implement that capital is essential. As debt markets continue to go private, it is vital that private lenders and capital advisors not only provide access to capital to this crucial sector of the economy but also offer the necessary education on how to take advantage of opportunities using the financing.