A Fed interest rate increase has been anticipated for years, and now it’s finally happened. The shoe has fallen, the pundits have emerged, and comments are flying on everything from the impact on mortgage rates to business access to capital. From our perspective, the impact to middle-market financing can be summed up in three short words: not much now.
When a company needs money, the actual interest rate for a short-term loan (or a longer term loan for some form of expansion), won’t stand in the way of the process. There are plenty of other hoops to jump through first, like underwriting. Getting to “yes” from a lender can be a challenge for middle-market companies; by the time you’ve reached the front of the line, the price of the ticket isn’t your biggest concern.
Research into the middle market has shown that 35% of middle-market companies do not actually know if traditional lenders or non-bank sources of capital are superior (Milken Institute, National Center for the Middle market, 2015). This means that there is room to improve on awareness, and that may prove to be the biggest impact of the Fed’s rate hike.
The concept that access to capital from traditional lenders may become increasingly constrained should lead middle-market companies to investigate other sources of funding including supply chain finance. In short, their eyes may be opened to other financial alternatives that provide a lower cost of capital, and have less impact on their balance sheet. Twelve months from now we may be looking at this event as the catalyst that propelled FinTech to its own next level of growth, through awareness of the alternative funding sources that are now available. Expect this awareness to increase with the second and subsequent hikes.