SME Focus. Back the business winners of tomorrow

When it comes to global trade, banks have traditionally focused on supporting multinationals and large corporates. By overlooking the needs of mid-sized companies, banks could be missing a serious trick. The importance of mid-sized companies to growth and job creation cannot be overstated. In Asia, Africa and the Middle East, these companies account for between 40 and 60 per cent of GDP.

Mid-sized corporates have come to play a much more important role in supply chains. Earlier, they would have focused on domestic markets, but now, many firms are fully active in overseas trade as suppliers and distributors. This is especially true for emerging markets; the world’s fastest-growing trade corridors are ‘south-south’ – such as trade between Asia and the Middle East, Latin America and Asia, and Asia and Africa.

Today, by the time a company reaches the mid-sized bracket, it is likely to be well underway to internationalising, looking for opportunities and support to further innovate and push into new markets. This is a crucial stage in the corporate lifecycle, and one which can make or break a company’s future.

Unfortunately, this is also the time when mid-sized corporates tend to hit something of a confused space in the banking industry – too big and complex to be served alongside small and medium-sized enterprises (SMEs), and too small to be fully on the radar of wholesale bankers.

Mid-sized corporates need the full complement of international banking services. Many have the same banking needs as large companies – cross-border payment collection, help to access capital markets for funding. In Asia, more companies are now issuing debt or equity well before they hit the ‘large corporate’ banking bracket. As they internationalise, many mid-sized corporates need advice on how to manage their cross-border cash flow, or how to use commodity or financial derivatives, to help manage risk. Increasingly, they also require advice from banks as to where and how they can they tap opportunities on offers beyond home markets. Many, like mid-sized Chinese firms, are looking to sell their products in Sub-Saharan Africa, or vice versa.

This represents a massive opportunity for banks to build a larger business with mid-sized companies but, until now, the industry has not quite kept pace with this shift in demand.

Mid-sized corporates have posed a challenge for banks. Though they have made it past the start-up phase, these companies are still riskier to serve than large corporates: their cash flow is less stable, because they depend on fewer clients, and because of their smaller balance sheets they are unable to absorb the same fluctuations as large companies. This makes them more vulnerable to defaulting on their loans, and more price-sensitive.

However, by seizing on internationalisation to serve mid-sized corporates in multiple markets with multiple products and services, banks can create a more stable and profitable income from these clients. By doing more business with these corporates, banks will be supporting a sector that is increasingly vital to economies around the world, but the rationale is not merely an altruistic one.

Companies forge long-term, loyal relationships with their banks when they are still young. By supporting companies at the early stage of their lifecycle, banks can build a pipeline of large corporate clients for the future. It is all about staying focused on the long-term, making sure you have the proactive risk management and capital strength to support clients through good times and bad. Mid-sized corporates are vital to trade, vital to growth and job creation and to banks. They are the innovators and business winners of tomorrow.

The writer is Global Head, Commercial Clients, Standard Chartered

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