Economic outlook in the middle market trends upward and commercial lending takes top position as source of capital

Middle market leaders indicated some of their top concerns (like higher inflation, labor costs, interest rates, and material and energy costs) were subsiding. In addition, fewer business leaders reported experiencing a cybersecurity or financial fraud issue within the past 12 months. These factors may have played a role in improving leaders’ outlook on the U.S. economy.

Meanwhile, fewer surveyed business leaders characterized their company outlook over the next 12 months as “excellent” compared to mid-2024. The overall decline was slight, but companies with $500+ million in annual revenue, those in the healthcare and retail industries, and those based in the Northeast and Western regions reported considerable downturns in sentiment.

Despite this softening, more than three-quarters of companies continue to have a positive company outlook for the next 12 months. Both company outlook and economic outlook were particularly high in the Midwest, increasing 11 and 16 percentage points, respectively, since the previous survey.

One concern intensified: the number of leaders who reported that geopolitical conflicts (not including those in Russia/Ukraine and Israel/Palestine) are negatively impacting their businesses reached an all-time high of 9% in the fourth quarter of 2024, up from 5% mid-year.

Companies are growing their revenues and workforce

There’s good news to share about growth in the middle market: most of the leaders KeyBank surveyed reported year-over-year growth in revenue. Those with a positive company outlook reported higher growth than those with lower outlooks, but surprisingly, those with “fair” or “poor” company outlooks also reported high growth.

Compared to other segments, businesses that are based in the Midwest, operate within the technology industry, and have $250-$500 million in total annual revenues all reported the highest percentages of annual growth between 2022 and 2024. Once again, those with a positive company outlook within these segments tended to outperform their peers.

Among business leaders with a positive company outlook, the top three contributing factors (although down from the second quarter of 2024) remained improved efficiency of business operations, improvements in technology, and the ability to attract and retain talent. Additionally, the number of respondents citing potential for lower tax rates (31%) and the new political landscape (29%) increased significantly.

As middle market businesses grow, they’re embracing AI, technology, and research and development (R&D) — and hiring more workers to manage the expansion. Between 2022 and 2024, the share of middle market businesses employing 2,000 or more people increased from 16% to 20%, and the median number of full-time employees grew from 400 to 500. There was also a significant increase in the share of companies planning to expand the scope of their businesses through R&D.

Anticipated M&A activity declines

Middle market business leaders lost some of their appetite for M&A activity at the end of 2024 compared to mid-year. The share of companies that anticipate being involved in M&A activity over the next two years declined — including among those with positive company outlooks on the buy-side and sell-side.

However, those who remain optimistic are still more interested in M&A than the total population, and more of those surveyed indicated an appetite for buy-side activity than sell-side. 

The top challenges of pursuing M&A activities remained steady from mid-2024. However, fewer business leaders cited “market disruptions/unpredictable events” as a top challenge for sell-side M&A in the fourth quarter.

Commercial lending ranks highest among potential sources of capital/credit

More than three-quarters of surveyed middle market business leaders said they used traditional and/or alternative sources of capital and/or credit in 2024 or planned to use them in 2025. Among those concerned with access to capital or credit, that number increased to 95%.

At the end of 2024, commercial lenders were the top source for middle market businesses seeking capital and credit. This represents a shift from six months prior, when private equity and private debt were the top two sources and commercial lending ranked third.

While private equity and private debt deals often attract attention in the marketplace, many executives and business owners prioritize the stability of working with an established commercial lender — particularly as these lenders’ appetites for deals is trending upward.

Fraud and cybersecurity incidents trend downward

Fraud protection and education efforts by middle market businesses and their banking partners seem to be paying off.

The latest survey revealed a decline in both the share of business leaders and executives who said that cybersecurity concerns were currently having a negative impact on their businesses and the share who had experienced a cybersecurity or financial fraud issue within the past 12 months. However, with AI-based fraud tactics still in their infancy, businesses and banks must remain vigilant as new threats emerge.

Middle market leaders also need to be aware of “old” threats. Despite the availability of faster, more secure, and more cost-effective payment methods, 93% of business leaders reported issuing payments by paper check within the past year. 

Businesses that continue to rely on checks, including those that use them infrequently, are vulnerable to the perpetual threat of check fraud — which affected more than one-third of respondents who reported a cybersecurity or fraud issue in 2024.

Conclusion

The KeyBank Middle Market Sentiment survey examines how trends among middle market business owners and executives change over time, and the latest results uncovered notable shifts.

First, company outlook softened slightly (although it remained strong) while economic outlook tipped upward. Second, commercial lenders ranked as the top choice among sources for capital and credit, above private equity and private debt.

In addition, concerns around inflation, costs, and supply chain disruptions subsided at the end of 2024. Survey respondents also reported fewer issues with cybersecurity and financial fraud — however, many are still making payments with paper checks, making them susceptible to the threat of check fraud.

Supported by a brightening economic horizon, 96% of surveyed middle market business leaders planned to expand their enterprises in the first half of 2025 — demonstrating that this vibrant segment of the U.S. economy is poised to tackle challenges and pursue growth in the coming year.