A theoretical model of financial intermediary- productive borrower bilateral monopoly with regime switching in business cycles is developed. This paper implies that the market power shifting either from an intermediary to a productive firm (Borrower) or from a productive firm to an intermediary has a direct effect on the composition of the optimal financial contract. This paper suggests that: (1 ) a loan-rate-taking financial intermediary dominated by a productive borrower is reluctant to grant new services during cyclical expansions and (2) a loan-rate-setting financial intermediary is willing to grant new services during cyclical contractions. Innovations in the financial intermediary's service are discouraged by monopsony power in the intermediary-borrower bilateral structure during cyclical expansions.