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Despite COVID-19 Challenges, Brighter Days Are Ahead for the Middle Market

Content sponsored in partnership with KeyBank

According to a new report by KeyBank, COVID-19 has shaken middle market businesses, but they're surviving and, in many cases, getting back to a state of normalcy.

The COVID-19 pandemic has impacted businesses around the world, but American businesses have faced some unique challenges. The virus continues to surge in the U.S., and there's a long way to go before things can truly return to a state of normalcy for businesses and their customers.

It's not all doom and gloom, though: Despite the economic strain and public health concerns, middle market business owners and executives are cautiously optimistic compared to their outlook at the beginning of the pandemic. Federal financial relief, plus some smart budgeting and operational adjustments, have helped these companies hold their own in the face of statewide shutdowns and stay-at-home orders, and they're poised to regain their footing as more restrictions are lifted across the country.

KeyBank – a full-service commercial, corporate and investment bank with nationwide branches – recently surveyed 400 U.S. middle market leaders ($10 million to $2 billion companies) for its Q3 2020 Middle Market Business Sentiment Report. Here's what the survey revealed about the current impact of COVID-19 on the middle market and what executives believe lies ahead for their businesses.

How has the U.S. middle market been impacted by COVID-19?

Between mid-March and early April 2020, nearly every state and region of the country had enacted some sort of stay-at-home order to prevent the community spread of COVID-19. During this time, many businesses, including 76% of middle market companies, were forced to either alter their operations or shut down completely while their home states were locked down.

Some states began reopening within a matter of weeks; others waited several months to begin lifting their quarantine restrictions. Because businesses are at the mercy of their state or region's policies, many of them have had to keep up with changing regulations designed to keep their staff and the larger communities safe.

Among KeyBank's survey respondents who reported taking action to mitigate the impact of COVID-19, these were some of the most common responses to the pandemic.

 

Implementing safety measures

Three-quarters of middle market leaders who made COVID-related operational changes reported implementing or increasing safety measures to reduce the risk of virus transmission. Respondents said they made the following changes over the last few months:

  • Enforced social distancing and/or wearing face coverings/masks
  • Changed operating hours or staggered/added shifts
  • Temporarily closed storefronts/offices
  • Instructed employees to work remotely
  • Increased or changed existing safety measures

Reducing staff and/or compensation

The pandemic has taken its toll on the U.S. job market, and middle market companies were not immune to cutbacks. Nearly 60% of leaders said their companies furloughed or laid off staff members, while 27% reduced employee compensation and/or benefits to cut costs.

One important factor that prevented further layoffs among middle market companies was the Paycheck Protection Program.

"The majority of customers we've talked to believe that the Paycheck Protection Program was effective and helped to save many jobs at each of their companies," said Timothy Burke, president of KeyBank Northeast Ohio. "Many would have laid off employees had it not been for that program."

Seeking financial assistance and transferring money

Despite the financial recovery initiatives in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, middle market businesses have felt the economic impact of COVID-19. KeyBank's survey found that 51% have sought loans or lines of credit, and more than a quarter had to transfer money out of investments or savings accounts to make ends meet.

Middle market leaders have also reported developing financial contingency plans for their businesses and reaching out to their business banking institutions for help and solutions.

Changing or negotiating payment terms with vendors and customers

As consumers and businesses find themselves with less money to spend, middle market companies have had to adjust their payment terms – with both vendors and customers – to compensate.

Twenty-five percent of survey respondents told KeyBank they had negotiated temporary monthly expense reductions, suspension of payments, or loan or relief modifications with vendors and creditors. Additionally, 23% said they had begun accepting different payment types from their customers and using business credit cards for payments more often.

 

How do middle market leaders feel about their future?

It's a far cry from business as usual among the middle market, but overall, leaders have a slightly more positive view of the future than they did in late March. Fifty-one percent of executives surveyed in late June said they felt somewhat or very positive about their business's performance. Fewer businesses (26%) now say they have a negative perception of their business health, compared to 37% in March.

Perhaps most reassuring is the fact that 70% of respondents said the impact of COVID-19 on their business so far hasn't been as bad as they expected. In fact, some even reported their business performance was even better than they projected at the beginning of the pandemic.

"While business leaders are concerned about the future impact of recent infection spikes, second quarter numbers have been, in many cases, better than the dire projections that many of our customers made," Burke said.

Future staffing plans

While most businesses that had to cut staff during the pandemic are not back at their pre-COVID staffing levels yet, many feel confident about getting their employees back to work. Among respondents who made staffing changes, 83% say they plan to bring back some or all of their furloughed employees, and 53% plan to rehire some or all employees who were laid off. Just 6% are planning for additional staff and/or benefits reductions, while 15% are looking to hire new employees.

Middle market M&A outlook

Middle market companies are often ripe for merger and acquisition deals, but COVID-19 has made the future of M&A uncertain for business leaders.

Just over half of the leaders surveyed for KeyBank's Q2 2020 report said their company somewhat or strongly considered an acquisition in the past six months, and that figure remains unchanged for Q3. However, because COVID-19 has decreased many company valuations, middle market businesses are concerned about their likelihood of completing an acquisition between now and the end of the year: More than 40% said it's very or extremely unlikely they'll complete an acquisition in the six months following the survey.

Economic concerns

Despite the growing optimism in the middle market, one looming concern could throw a wrench into their future financial plans. As COVID-19 continues to impact American daily life, survey respondents are still very wary about the national economy.

Unsurprisingly, the pandemic is the primary reason for this attitude among middle market leaders, with 90% of survey respondents citing COVID-19 as a factor in their low outlook for the U.S. economy. While rising retail sales, increased consumer spending and better stock performance have increased gross domestic product and helped the second quarter finish out strong, Bloomberg Economics noted that the country's inability to contain the virus has slowed the pace of the economy's overall rebound.

Other big economic concerns include a potential recession (67%), the volatile political landscape heading into the 2020 presidential election (56%) and higher healthcare costs (33%).

What can middle market companies do to position themselves for success in the post-COVID world?

It's clear that the middle market has been shaken but not broken by the coronavirus pandemic. Half of the companies that reported changes to their business operations as a result of COVID-19 now say they are somewhat or fully operational again, and their financial positions are beginning to stabilize.

Businesses aren't out of the woods yet, though: As KeyBank notes, economic recovery throughout the rest of 2020 will depend on public health and cooperation from the private and public sectors to get COVID-19 under control.

For middle market businesses that hope to not only survive but thrive throughout the pandemic, the best thing to do is seek assistance from a trusted financial advisor. Full-service institutions like KeyBank can offer financial solutions, as well as real-time support and market insights as your business responds to and recovers from COVID-19.