Stuck in the Middle: Midsize Firms Attempt to Find Stability Amidst Turmoil

Just a few years ago, interest rates and inflation were at historical lows. However, pandemic-fueled shutdowns, disrupted supply chains, and ongoing labor issues have entirely changed the economic landscape for all organizations. Today, we continue to see the Fed attempt to curb persistent inflation with ongoing interest rate increases in 11 of its last 12 meetings.

These economic disruptions reach companies of all sizes, but how they affect each is significantly different. For middle market companies, those with revenues between $10 million and $1 billion, the stakes feel higher. Growth requires strategic risk, and entrepreneurial companies in the middle market understand this better than most. But despite all their challenges, two seem to be the most dominant: banking costs and attracting talent.

On Banking Turmoil: The Collapse of SVB and Its Rippling Effects

The American economy experienced its second, third, and fourth largest bank failures with the collapse of Silicon Valley Bank, Signature Bank, and First Republic Bank this past spring. Together, these three banks accounted for 2.4% of all assets in the banking sector, according to FDIC data.

Although several reasons led to the failure of SVB, the bank was taken over by the FDIC following a bank run from worried customers losing trust in the bank’s liquid stability. Although regulators have since ensured SVB’s depositors would have access to their funds, including those with balances over the FDIC’s $250,000 insurance limit, the failures have executives reevaluating their cash management practices.

In speaking with Middle Market Growth, CFO of EyePoint Pharmaceuticals, George Elston, refers to the bank collapses during spring as a “wake-up call to smaller firms and their management of cash in operating, savings, and asset-management accounts.” Whereas an organization could once calculate the cost of banking versus the benefit of cash allocation, “liquidity risk [now] needs to be a meaningful factor in where cash resides,” Elston says.

Traditionally, small and middle market companies have relied on regional banks like SVB to provide credit funding. In its history, SVB conducted business with many well-known technology companies during its early years, such as Shopify, Pinterest, Fitbit, and more. But since the collapse, growing concerns have forced executives to reevaluate their banking relationships and cash diversification. However, middle market companies aren’t the only ones putting their guard up—the banks themselves are as well.

According to the July 2023 Senior Loan Officer Opinion Survey (SLOOS), banks reported having “tighter standards” for commercial and industrial loans to firms of all sizes since the start of the year. Furthermore, Biz2Credit’s Small Business Lending Index showed that loan approval at big banks dropped from 14.4% in January to 13.3% in July, representing the lowest figure since January 2021. The report also found that approval rates for business loan applications decreased from 21.4% to 18.9% during the same period.

Business expansion and growth are restricted when middle market organizations lose access to funds or cannot receive new financing. Overall, the bank failures in spring and ongoing rate increases set the stage for elevated banking costs when mid-sized firms seek new banking credit. And for firms looking towards expansion, they must consider how their labor costs will increase, too.

Challenges With Finding and Retaining Top Talent

In an Agency Forward survey from Nationwide of 200 mid-market executives, responders indicated that finding, retaining, and growing top talent are some of their organizations’ greatest challenges in 2023. This may be no surprise for anyone who has monitored labor statistics during the last few years. Although last month’s unemployment rate of 3.8% is a welcomed figure compared to 2020-2021 reports, lasting effects still plague the labor market for companies throughout varying industries.

For the middle market company—one that is entrepreneurial in nature—wearing multiple hats throughout the organization is necessary to drive performance in offices that lack the workforce or access to funds that major corporations have. But finding qualified talent willing to do the work comes at a cost: increased salaries.

The cost of business in 2023 is undoubtedly greater than it’s ever been. However, it doesn’t simply end at an employee’s paycheck. Facing increased costs in day-to-day operations and banking, middle market executives must position their organizations to act strategically when searching for and hiring new talent. What drives company growth is collaborative efforts between all departments. Yet creating a sustainable culture within an organization that promotes efficiency while maintaining a work-life balance isn’t necessarily easy or cheap.

Much of what has fueled labor disruption since 2020 has been the remote-hybrid debate, with many candidates refusing to return to the office full-time. In such an economy, organizations that offer greater flexibility and choice are better positioned to attract top-level talent. For the middle market executive with limited capital, this could mean offering flexible work models to compete with the greater salary ranges provided by larger companies. As we continue into the new year, firms must readjust their hiring practices to better reflect what we’ve observed in the labor market.

How Executives Unlimited Can Help

In times of distress, building and maintaining a core team of executive leaders is fundamental to an organization’s success. Drafting, producing, and implementing new business strategies requires a level of trust and understanding of the business that cannot be overlooked. As we observed during the Great Resignation of 2020, companies willing to adapt will be in a better position for growth than firms relying on dated practices.

At Executives Unlimited, we understand the importance of your next hire. With a roster of clients from across the country, we have a long history of helping organizations find and recruit lasting senior executive talent during times of increased stress and transition. In such times, looking at candidates through a different lens is vital. Executives Unlimited will work with your team to guide you along your search, helping you find candidates that fit your culture and complement your goals.