Traditional bank lenders are applying more pressure to borrowers and now showing less tolerance when mid-sized companies in the U.S. miss financial targets, according to a new survey of business executives and lenders sponsored by Carl Marks Advisors, a leading investment bank.

The survey found that rising inflation, persistent labor shortages and a desire to improve capital structures are among the key factors leading middle market companies to seek alternative financing options. The research also found that lingering supply chain concerns and COVID-19 after-effects remain a cause for concern among more than 50% of respondents; just 20% of those surveyed said supply-chain-related lead times are almost back to what they were pre-pandemic.

58% of respondents believe the current wave of bank consolidation – such as J.P. Morgan’s recent acquisition of First Republic – has had a net positive impact for companies seeking lending options. 76% believe that ESG and sustainability mandates for lenders have had a negative impact on the availability of capital across certain sectors.

“When we surveyed the lending environment two years ago, we were still in the midst of the pandemic, and banks were giving middle market borrowers a high degree of leeway on their financial targets – essentially kicking the can down the road,” said Robert Lau, Partner at Carl Marks Advisors. “Today, the dynamics have shifted, and banks are enforcing stricter terms and having much tougher conversations with management teams. We have also seen an increasing variety of alternative lenders stepping in to fill a void in the market and provide more flexibility to companies. One of the factors driving this is the willingness of alternative lenders to adopt a more relationship-oriented and less transactional approach.”

40% of survey respondents also singled out financial services as the industry most challenged in securing the financing to support operations, goals and growth, and identified tight labor supply and steep labor costs as key factors in margin compression.

Other key findings from the survey:

• 86% of respondents believe traditional lenders are applying more pressure to their middle market borrowers and showing less tolerance when they miss financial targets.

• As alternative lenders become a larger part of the middle market lending landscape, 23% of respondents said they are providing leverage, flexibility and ease of execution beyond traditional banks, while 22% say they are more flexible and supportive of challenged borrowers.  

• Only 17% of respondents said that alternative lenders are more aggressive than banks when dealing with a borrower facing financial challenges.

Carl Marks Advisors sponsored the online survey from May 16 – 25, 2023. In total, 252 responses were collected from mid-level executives, founders and owners of middle market firms with annual revenues between $25 million and $300 million, as well as business advisors, private equity sponsors, traditional lenders and alternative lenders across the United States.