The collapse of Silicon Valley Bank (SVB) has left many small business owners wondering what’s next. Although most of the conversation about SVB centers on tech startups, the bank had small business clients as well. Learn what a bank failure could mean for small businesses and how to protect yourself going forward in this guide from Nav.
What Is a Bank Collapse?
A bank fails when it can’t meet its financial obligations to its depositors and other customers — or, simply put, it runs out of money. State and federal banking regulators have the power to close a bank when it becomes insolvent, or unable to pay what it owes.
Banks often invest a large portion of the money that is deposited by customers and keep a smaller portion on hand for when customers pull out funds. A bank run can happen when customers get spooked about the stability of the bank and they all try to remove their money at one time. Even if a bank has billions of dollars in deposits, it may not be able to access enough of those funds in time when there’s a run on the bank.
What’s Happening With The Banking Industry Now
The good news is that your bank is most likely not going to fail. Although there’s now a risk of eroded trust in the U.S. banking industry that some fear could lead to bank runs elsewhere, it’s important to remember that the FDIC insures a certain amount of deposits. Additionally, the federal government created the Bank Term Funding Program on March 12, promising to return all depositors’ money, which had a positive impact in stabilizing markets.
Although it can be easy to worry about market stability, there are many protections in place that keep your small business’s money safe.
How Does the FDIC Protect Small Businesses?
The Federal Deposit Insurance Corporation (FDIC) was launched following the Great Depression to keep depositors’ money safer. The FDIC automatically insures up to $250,000 in deposits “per depositor, per insured bank, for each account ownership category.”
During a bank collapse, the FDIC promises the bank’s customers that they will receive all of their insured funds, meaning any deposits up to $250,000. Any deposits over that amount are technically uninsured. However, uninsured depositors get a “receivers certificate” from the FDIC, which is a claim to liquidated assets from the bank itself. In this particular circumstance, the federal government has promised to return all funds to companies that deposited with failed banks through the Bank Term Funding Program.
How a Bank Collapse Impacts the Small Business Ecosystem
In the wake of a bank failure, there are issues that customers of the bank or vendors that used the bank face. Businesses that relied on the bank to hold its money may lose access to insured funds for a short amount of time. Luckily, the FDIC is quick to return insured funds to businesses, so these impacts shouldn’t be long lasting. Businesses with more than the insured funds will have a longer road to full recovery, but the government is promising to return all the deposits.
The Federal Reserve (called the Fed) controls the federal funds rate, which is what many banks use to calculate the interest rates they charge their borrowers. The Fed decided to raise rates by 0.25% in late March even in midst of the banking disruption. This meant that interest rates on business financing increased as well, which could lead to more expensive borrowing in the short-term. However, the expected effect of these Fed rate increases is to lower interest rates in the longer term. So although it’s a bit painful currently, these rate increases are expected to make it more affordable to borrow in the long term.
Prepare Your Small Business for Any Possible Scenario
It’s impossible to tell the future, but you can set your business up for the highest chances of success by making informed business decisions. Here are some steps to think through to help protect your small business from risks.
1. Understand your banking options
Your business checking account should be FDIC insured. You can also look into the bank’s financial statements, as well as customer reviews, to get an idea of how it’s performing.
Additionally, consider opening accounts at multiple banks or financial institutions. If you have more in deposits that will be insured if the bank fails, it might be a good idea to spread out your deposits with multiple banks. That way, you already have relationships formed with multiple banks and will make any necessary transitions quicker and easier.
2. Update your business insurance policies
Business insurance protects you in cases of accidents or liability issues. And it may be required, depending on your business. You can get business insurance for things like commercial property, product liability, professional liability, commercial vehicles, and workers’ compensation. Take a look at which policies you currently have and make sure they’re adequate for protecting your business as a whole.
3. Utilize debt financing
Some startups are now considering turning to debt financing since venture capital is much harder to get. Debt financing consists of taking on debt from products like small business loans or business credit cards. Some financing options, like lines of credit and business credit cards, can be used as needed — and you only pay interest on what you borrow.
It may be a good idea to apply for small business financing before you need it so it’s available in times of difficulty, and before rates increase further. Using Nav is the easiest way to find the right financing options for your business. Nav uses your specific business details to let you see what’s right for you before you apply.
4. Control your cash flow
Cash flow is one of the most important aspects of running a small business. Managing cash flow well can help your business succeed, even in the face of adversity. If you don’t have a good grasp of your cash flow, you can use Nav’s Cash Flow Tool to get an overview of how it’s working for you and if you need to make adjustments.
This article was originally written on March 14, 2023 and updated on April 3, 2023.