The Power of Operational Efficiency and Capital Access in the Middle Market

The recently released KeyBank Middle Market Business Sentiment Survey reveals a striking trend: middle market companies are experiencing notable growth and increasingly turning to commercial lending to fuel their expansion. This shift in capital sourcing preferences, coupled with strategic investments in technology and talent, offers important insights for finance leaders navigating today's economic landscape.

Key Findings from the Survey

The KeyBank survey paints a picture of a resilient middle market sector with a positive economic outlook. Among the most significant findings:

• Commercial lending has emerged as the top source of capital (45%), overtaking private equity and private debt, which dominated six months earlier
• 78% of businesses have used or plan to use traditional or alternative capital sources, rising to 95% among those concerned about capital access
• The median number of full-time employees in surveyed companies increased from 400 to 500 between 2022 and 2024
• The top factors contributing to a positive business outlook include improved operational efficiency (53%), technology improvements (51%), and talent acquisition (34%)

As Buffalo Market President Michael McMahon notes in the report, "Bank debt is cheaper, easier, and not as restrictive. Even though private equity is rapidly penetrating the lower middle market, there's a portion of that segment that isn't ready to give up their own equity yet."

The Intersection of Operational Efficiency and Capital Strategy

At BankGauge, we've observed that the most successful middle market companies don't treat operational efficiency and capital access as separate concerns. Instead, they recognize how deeply interconnected these elements are in driving sustainable growth.

The KeyBank survey reinforces this perspective, showing that companies investing in business efficiency and technology are reporting stronger growth trajectories. However, we often find that CFOs don't fully leverage their banking relationships to support these operational improvements.

Many finance leaders approach their banks primarily as sources of loans rather than as strategic partners who can provide specialized tools, industry insights, and tailored financial structures to enhance overall business performance.

For example, the survey notes that 54% of companies are implementing AI and 49% are expanding their use of technology and automation. These initiatives often require not just capital but also sophisticated financial structures and specialized banking services that traditional commercial loans might not address.

Optimizing Your Financial Structure for Growth

To fully capitalize on the trends identified in the KeyBank survey, middle market CFOs should take a more holistic approach to their capital structure and banking relationships. Here are two critical actions to consider:

1. Analyze Your Capital Structure Against Growth Objectives

Begin with a comprehensive review of how your current capital structure supports (or potentially hinders) your operational goals:

• Examine whether your existing debt facilities provide sufficient flexibility for your technology investment plans
• Assess if your current banking relationships offer industry-specific expertise relevant to your growth strategy
• Compare the total cost of capital across different financing options, including both explicit costs (interest, fees) and implicit costs (covenants, reporting requirements)
• Consider how your capital structure might need to evolve as your business grows and operational priorities shift

The KeyBank survey reveals that middle market companies are increasingly using multiple banks (37%, up from 35%), suggesting a more strategic approach to banking relationships. This multi-bank strategy can provide access to specialized capabilities and competitive terms, but requires careful management to avoid inefficiencies.

2. Enhance Your Fraud Protection Through Banking Partnerships

The survey shows encouraging progress in cybersecurity, with fewer businesses reporting negative impacts from security issues. However, 27% of respondents still experienced a cybersecurity or fraud issue in the previous 12 months, with phishing/email spoofing (42%) and check fraud (35%) remaining significant threats.

Most concerning is that 93% of middle market companies continue to make payments by physical check, exposing themselves to unnecessary fraud risks despite the availability of more secure payment methods.

As Matt Swope, Senior Product Leader at KeyBank Payments, notes in the report: "Protecting a business against fraud is an ongoing challenge — and each new threat represents a moving target. Business leaders need to have a focused, open dialogue about fraud and cybersecurity with their bank representatives at least once a year."

Work with your banking partners to:

• Implement advanced fraud detection and prevention tools tailored to your payment volumes and patterns
• Transition from paper checks to more secure electronic payment methods
• Develop clear protocols for payment authorization and verification
• Stay informed about emerging fraud threats and prevention strategies

Bringing Banking and Operations Together

The KeyBank survey highlights how middle market companies are doubling down on technology, talent, and capital to drive growth. To maximize the impact of these investments, finance leaders should actively seek ways to align their banking relationships with their operational priorities.

Consider scheduling quarterly strategic discussions with your relationship managers that focus not just on loans and rates, but on how banking services can enhance your operational efficiency. Bring your operations and technology leaders into these conversations to ensure banking solutions address real business needs.

For example, if you're investing in AI and automation as part of your growth strategy (as 54% of surveyed companies are), discuss with your banks how their treasury management services might integrate with these new systems to improve cash flow visibility and forecasting.

Similarly, if talent acquisition is a priority (as it is for 34% of companies with a positive outlook), explore how your banking partners' payroll, benefits, and international payment capabilities might support your workforce strategy.

Conclusion

The KeyBank Middle Market Business Sentiment Survey reveals an optimistic middle market sector increasingly turning to commercial lending while investing strategically in operational improvements. For CFOs and finance leaders, this presents an opportunity to reevaluate how banking relationships can be leveraged to enhance both capital access and operational efficiency.

By taking a more integrated approach to financial structure and banking partnerships, middle market companies can position themselves for sustainable growth and resilience in an evolving economic landscape.

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