How small businesses can find safety for the next banking crisis

The collapse of two regional lenders, Silicon Valley Bank and Signature Bank, sparked a wave of panic among small businesses nationwide last month. the failing institutions.

As the panic begins to subside, advisers are recommending 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 Locked moman e-commerce company that sells clothes for nursing mothers, she did it with a loan from her personal savings — as most small business owners do. She chose to open a business account with Atlantic Union Bank because her personal accounts were there, making it easy to transfer money when her business needed money.

In addition, she loved her personal relationship with Atlantic Union Bank. “They saw my business grow 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.”

She rarely has more than $250,000 in the bank, but during the recent bank turmoil, she worried that if Atlantic Union also failed, she wouldn’t be able to earn her $60,000 biweekly salary for her nearly 40 employees. So she opened a second business account with a larger bank.

How many small businesses are at risk?

Experts say most small businesses have little risk in a bank failure. The Federal Deposit Insurance Corporation insures deposits of up to $250,000, and most small businesses probably hold 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 have a median cash balance of just $12,100.

Two things can change that risk assessment: having employees or being funded by venture capital.

Labor costs are one of the largest cost items for most companies. Gusto, a payroll and benefits provider for 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 about 33 million small businesses have employees, according to the Small Business Administration, meaning few have significant payroll costs that could push their deposits above $250,000.

And only 5 percent of companies sit on investor war chests. “Silicon Valley Bank was not financing small businesses in Main Street, US,” said Aaron Klein, a senior fellow in economic studies at the Brookings Institution. “They were start-ups in the banking sector, mainly with venture capital backing.”

As a small business owner, should I worry about my bank failing?

Bank failures have been rare since the last financial crisis, back then nearly 500 banks collapsed from 2008 to 2013. But they can happen at any time. a recent research paper suggests 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 do I bank with?'” said Rebecca Romero Rainey, president and chief executive of Independent Community Bankers of America, a trade group. “The risk profile will be very different for a bank that specializes in a unique or riskier sector.”

I have less than $250,000 in my account. What should I do?

As long as your deposits are insured by the FDIC, your risk is limited to inconvenience and delays. Supervisors usually take over failing banks on Friday afternoon, so that the Ministry of Finance can sort everything out over the weekend. By Monday, savers usually have access to their money.

Small business owners should instead focus on their day-to-day operations. “Go back to worrying about your business,” Mr. Klein said. “If a bank fails, the government there is madly in love.”

I have over $250,000. Do I need to open multiple accounts?

You can have as many accounts with one bank as you like, but a balance of more than $250,000 on all your deposits is not insured. The FDIC limits are per depositor, per institution – not per account.

However, there is some nuance.

Business accounts are insured separately from personal accounts. This means that one deposit holder can be insured for both private and business purposes. For example, in Ms. Wirt’s case, she would be covered up to $250,000 for her Latched Mama accounts and up to $250,000 for her personal accounts.

Additionally, if you have a joint checking account with a 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 is insured.

However, having multiple signers on a business account does not increase insurance coverage. It’s best to talk to your banker, Mrs. Rainey said.

Do I have to open accounts with other banks?

Diversifying your holdings is always a good idea. The FDIC insures every depositor at every institution, so spreading your wealth provides more coverage. Having a second bank relationship also makes it easier to quickly transfer money to safety if you’re worried about your bank being unstable.

“Always have a backup strategy; hope is not a strategy,” said Jeni Mayorskaya, founder of Stork Club, which creates reproductive health benefits packages for companies to offer their employees.

She has raised more than $30 million from investors and was encouraged to keep her money with Silicon Valley Bank. But when she started hearing whispers that the bank might go bankrupt, she opened accounts elsewhere.

“I grew up in Russia in the 1990s, and what we saw was a financial collapse every five years,” she said. “We learned that you always have a diversification strategy.”

What other options are there?

Banks can mitigate risk through the IntraFi network, a system that can split a customer’s large deposit into chunks smaller 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 chop up a customer’s money into certificates of deposit less than $250,000 and place those accounts with other institutions. The CDs earn interest, but the downside is that the money cannot be withdrawn penalty-free before the CDs mature.

The second option is a sweep account, where a customer’s balance of more than $250,000 is “swept” each night in smaller blocks to other IntraFi Network banks.

With either choice, these deposits are protected by the FDIC because they are technically located elsewhere.

“This has been more relevant in recent weeks,” said Matthew Burke, CEO of Cape Cod 5, a 168-year-old community bank in Massachusetts. “Customers can still log in and view their accounts, but we’re essentially achieving 100 percent FDIC insurance.”

The service is free, but only relevant to companies with uninsured deposits. For Cape Cod 5, that means fewer than 1,000 out of more than 100,000 customers. Mr. Burke contacted those customers to set up sweep accounts. Some have declined, saying they are familiar with the bank’s track record.

But others, such as the accountancy firm Glivinski & Associates, also use the service. Because Glivinski handles financial matters for its clients, it needs to have cash available, and the statement accounts allow it to have working capital and keep it insured.

Glivinski has also sent his clients to Mr. Burke to set up sweep accounts. “Nearly 80 percent of our clients are nonprofits,” said Valerie Silva, chief operating officer of Glivinski. “Even they have more than the FDIC limits in the bank because their budgets run into the millions.”

Should I be concerned about my service providers?

The collapse of Silicon Valley Bank caused unexpected ramifications for small businesses as several payroll processing companies banked there and their money was temporarily held while federal regulators sorted out the mess. In the meantime, those companies could not cut the wages of their customers’ employees.

One of the lessons Ms. Wirt, the owner of Latched Mama, learned was, ask where your service provider bank. She was happy to learn that Gusto, her payroll company, had backups. If it got caught up in a bank collapse, Gusto said, it 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 CFO.