Middle Market Lending

Sponsored and Non-Sponsored Borrowers

Lenders treat private equity-backed companies differently from founder or family-owned ones. A sponsored borrower brings an owner with a track record, equity committed to the deal and an incentive to support the company in a downturn. Lenders may offer more leverage and looser terms as a result.

Non-sponsored companies can still borrow on good terms, but lenders tend to look harder at succession plans, personal guarantees and how much cash the owners plan to take out. Fewer lenders focus on this group, which makes a well-run process more valuable.

Typical Terms and Covenants

Most middle market lending agreements include financial maintenance covenants tested each quarter, usually a maximum leverage ratio and a minimum coverage ratio. Expect monthly or quarterly financial reporting, an annual budget, limits on new debt and dividends, and mandatory prepayments from asset sales or excess cash flow.

Interest is usually floating, set as a margin over a benchmark such as SOFR, the Secured Overnight Financing Rate published by the Federal Reserve Bank of New York. Private credit loans may also carry prepayment premiums in the first years.

Preparing Your Company to Borrow

1. Get at least reviewed, and ideally audited, financial statements for the past three years.

2. Build a monthly projection with clear assumptions for revenue, margins and capital spending.

3. Document every EBITDA adjustment with support a lender can verify.

4. Summarize existing debt, leases and liens.

5. Prepare a short narrative on strategy, customers and management.

Frequently Asked Questions

Do middle market lenders require personal guarantees?
It depends on the company's size and ownership. Guarantees are common in the lower tier and for founder-owned firms, and less common for larger companies or those backed by an institutional owner.

Are banks or private funds better for mid-sized companies?
Banks are usually cheaper but more conservative on leverage. Private funds often lend more and move quickly, at a higher rate. Many companies use both, with a bank revolver alongside a private term loan.

How long does a middle market loan take to close?
It varies with complexity, diligence and legal work. A refinancing with an existing lender is usually faster than a new acquisition financing.

Explore Options for Your Mid-Sized Company

If your business has outgrown small business loans, the next step is learning which structures and lenders fit its size and cash flow. Gather your financials and projections, then explore the middle market lending options available to companies in your range.

Middle market lending is credit extended to companies that are bigger than a typical small business but not large enough to borrow in the public bond or broadly syndicated loan markets. These are often established, profitable firms with professional management, a few hundred employees and real borrowing needs for acquisitions, expansion or refinancing.

Deals in this segment are privately negotiated. A lender, or a small group of lenders, works directly with the company or its owners, so terms can be shaped around the business in a way public markets rarely allow.

Who Counts as a Middle Market Company

There is no legal definition. Lenders, regulators and researchers each draw the lines differently. The Federal Reserve's quarterly Senior Loan Officer Opinion Survey, for example, groups "large and middle-market firms" together as businesses with annual sales of $50 million or more, and treats firms below that as small.

Private lenders more often sort borrowers by EBITDA, because that is what they lend against. Many split the market informally into three tiers:

• Lower middle market. Smaller, often founder-owned companies where the owners may still guarantee debt and a single bank may handle all borrowing needs.

• Core middle market. Companies with established finance teams, audited statements and access to both banks and private credit funds.

• Upper middle market. Larger companies that can attract big lending groups and may be close to accessing the syndicated loan market.

Each lender sets its own cutoffs, so ask any prospective lender where your company falls in its target range.

Why This Segment Is Different

Middle market companies sit in a gap. Federal small business programs have caps that limit their usefulness for larger deals. The U.S. Small Business Administration's flagship 7(a) loan, for instance, tops out at $5 million. At the same time, these companies are usually too small, or too private, to issue rated bonds.

That gap shapes middle market lending in three ways:

• Relationships matter. Lenders often hold loans to maturity rather than selling them, so they care about management and long-term performance.

• Documents are negotiated. Covenants, reporting and amortization are tailored deal by deal.

• Less public information exists. Lenders rely heavily on their own diligence, including quality of earnings reports and site visits.

Common Loan Types

• Revolving credit facility. A line the company draws and repays to fund working capital and seasonal swings.

• Term loan. A fixed amount repaid over several years, used for acquisitions, equipment or refinancing.

• Delayed draw term loan. A commitment the company can draw later, often reserved for planned add-on acquisitions.

• Asset-based loan. A revolver sized on receivables and inventory, useful when earnings are uneven but collateral is strong.

• One-stop and junior financing. Single blended loans from private credit funds, or mezzanine and second lien debt that sits behind a senior lender.

How Middle Market Lenders Underwrite

Lenders in this segment weigh cash flow first and collateral second. A typical review covers:

• Adjusted EBITDA. Earnings before interest, taxes, depreciation and amortization, with one-time costs added back. Lenders scrutinize every adjustment.

• Leverage. Total debt divided by EBITDA. A company with $24 million of debt and $8 million of EBITDA carries leverage of 3.0x.

• Coverage. Whether cash flow comfortably pays interest, scheduled principal and other fixed charges.

• Business quality. Customer concentration, contract length, margins, industry cycles and the depth of the management team.

• Ownership. Who owns the company and how much equity they have at risk.