The collapse of two regional lenders, Silicon Valley Bank and signature banklast month sparked a wave of panic among small businesses across the country as owners saw the news and wondered if their assets were safe, even if their deposits weren’t with one of the failed institutions.
Now that the panic has begun to subside, advisers recommend that small businesses examine their accounts to determine their level of risk and protect their deposits from a future bank failure.
When Melissa Wirt started mom hookedan e-commerce company that sells clothing for nursing mothers, did so with a loan from her personal savings — like most small business owners do. He chose to open a business account at Atlantic Union Bank because his personal accounts were there, making it easy to transfer funds if his business needed a cash injection.
Also, he liked his personal relationship with Atlantic Union Bank. “They saw my business and my family grow,” Ms. Wirt said. “We went through the collective trauma of Covid together and I learned that banks can care about their customers.”
He rarely has more than $250,000 in the bank, but during the recent banking turmoil, he worried that if Atlantic Union also failed, he might not be able to pay his $60,000 biweekly payroll for his nearly 40 employees. So he opened a second business account at a larger bank.
How many small businesses are at risk?
Experts say that most small businesses face little risk in the event of a bank failure. The Federal Deposit Insurance Corporation insures deposits up to $250,000, and most small businesses probably keep much less money than that in the bank. The JPMorgan Chase Institute surveyed 600,000 of its small business account holders and found that they had a average cash balance of just $12,100.
Two things can change that risk assessment: having employees or being funded by venture capital.
Payroll costs are one of the biggest expenses for most businesses. Gusto, a provider of payroll and benefits to more than 300,000 small businesses, said nearly half of its clients with 50 to 99 employees had monthly payrolls of more than $250,000. That figure jumps to 95 percent for companies with more than 250 employees.
But only 20 percent of the country’s population approximately 33 million small businesses they have employees, according to the Small Business Administration, which means few have significant payroll costs that could cause their deposits to exceed $250,000.
And only 5 percent of companies are sitting on investor war chests. “Silicon Valley Bank was not banking small businesses on Main Street, USA,” said Aaron Klein, a senior fellow for economic studies at the Brookings Institution. “They were banking tech startups mostly backed by venture capital.”
As a small business owner, should I worry about my bank failing?
Bank failures have been rare since the last financial crisis, when nearly 500 banks collapsed from 2008 to 2013. But they can happen at any time. TO recent research paper suggests that nearly 200 banks are at risk based on the same conditions that brought down Silicon Valley Bank: exposure from rising interest rates, plus high levels of uninsured deposits.
“I think this is a really interesting time for people to ask, ‘What kind of bank am I doing business with?’” said Rebecca Romero Rainey, president and CEO of Independent Community Bankers of America, a trade group. “The risk profile is going to be very different for a bank that specializes in a unique or higher-risk industry.”
I have less than $250,000 in my account. That I have to do?
As long as your deposits are FDIC insured, your risk is limited to inconvenience and delay. Failed banks are typically taken over by regulators on Friday afternoons so the Treasury Department can spend the weekend figuring everything out. By Monday, depositors typically have access to their funds.
Instead, small business owners should focus on their day-to-day operations. “Go back to worrying about your business,” Klein said. “When a bank fails, the government is there in the blink of an eye.”
I have more than $250,000. Do I have to open multiple accounts?
You can have as many accounts at one bank as you want, but any balance over $250,000 across all your deposits will not be insured. FDIC limits are per depositor, per institution, not per account.
However, there is some nuance.
Business accounts are insured separately from personal accounts. That means a depositor can be insured both as an individual and as a business. In the case of Ms. Wirth, for example, she would be covered up to $250,000 for her Latched Mama accounts and up to $250,000 for her personal accounts.
Also, if you have a joint checking account with your spouse, each person is insured for a total of $500,000. For example, if you keep $300,000 in the joint account plus $100,000 each in a savings account, your entire $500,000 will be insured.
However, having multiple signers on a business account does not increase insurance coverage. The best thing to do is talk to your banker, Rainey said.
Should I open accounts at other banks?
Diversifying your holdings is always a good idea. The FDIC insures every depositor at every institution, so spreading your wealth offers more coverage. Having a second banking relationship also makes it easy to quickly transfer funds to a safe place if you’re worried your bank is shaky.
“Always have a backup strategy; hope is not a strategy,” said Jeni Mayorskaya, founder of the Stork Club, which creates reproductive health benefit packages that companies can offer their employees.
She has raised more than $30 million from investors and was encouraged to keep her funds at Silicon Valley Bank. But when she started hearing rumors that the bank might fail, she opened accounts elsewhere.
“I grew up in Russia in the 1990s and what we saw was a financial collapse every five years,” he said. “We learned that you always have a diversification strategy.”
What other options are available?
Banks can mitigate risk through the IntraFi Network, a system that can split a customer’s large deposit into parts that are less than the $250,000 limit. It then sends those chunks to other banks in the system, essentially giving customers multiple FDIC-insured accounts without having to open and track each account.
Customers have two options for how it happens.
In the first situation, banks divide a customer’s money into certificates of deposit of less than $250,000 and place those accounts with other institutions. CDs earn interest, but the downside is that money cannot be withdrawn without penalty before the CDs mature.
The second option is a sweep account, in which a customer’s balance in excess of $250,000 is “swept” nightly to other banks on the IntraFi Network in smaller blocks.
With either option, these deposits are protected by the FDIC because they are technically located elsewhere.
“This has been more relevant in recent weeks,” said Matthew Burke, chief executive of Cape Cod 5, a 168-year-old community bank in Massachusetts. “Customers can still log in and view their accounts, but essentially we got 100 percent FDIC insurance.”
The service is free but relevant only for companies with uninsured deposits. For Cape Cod 5, that means fewer than 1,000 of its more than 100,000 customers. Mr. Burke has been reaching out to those clients to set up sweep accounts. Some have refused, saying they are comfortable with the bank’s track record.
But others, like the accounting firm Glivinski & Associates, are using the service. Because Glivinski handles his clients’ financial affairs, he needs to have access to cash, and sweep accounts allow him to have working capital and keep it secured.
Glivinski has also been referring his clients to Mr. Burke to set up sweep accounts. “Nearly 80 percent of our clients are nonprofit organizations,” said Valerie Silva, Glivinski’s chief operating officer. “Even they have more than the FDIC limits on the bank because their budgets are in the millions.”
Should I worry about my service providers?
The Silicon Valley Bank collapse caused unexpected consequences for small businesses because several payroll processing companies worked there and their funds were temporarily held while federal regulators ironed out the problem. Meanwhile, those companies couldn’t cut the salaries of their clients’ employees.
One of the lessons Ms. Wirt, the owner of Latched Mama, learned was: Ask where their service providers bank. She was pleased to learn that Gusto, her payroll company, had backups. If she were caught in a bank collapse, Gusto said, she could easily handle Ms. Wirt’s payroll from another account.
“We say it’s good to have a redundant payroll processing system,” said Mike Taylor, Gusto’s chief financial officer.
