How small businesses can find safety before the next bank crisis
The collapse of two regional lenders, Silicon Valley Bank and Signature Bank, last month caused a ripple of panic among small businesses nationwide as owners watched the news unfold and wondered whether their assets were safe — even if their deposits were not in one of the failed institutions.
Now that the panic has begun 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.
How many small businesses are at risk?
Experts say most small businesses face little risk in a bank failure. The Federal Deposit Insurance Corp. insures deposits of up to $250,000, and most small businesses probably keep far less money than that in the bank. The JPMorgan Chase Institute surveyed 600,000 of its small-business account holders and found that they held a median cash balance of $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 companies. Gusto, a payroll and benefits provider for more than 300,000 small businesses, said nearly half its clients with 50 to 99 employees had monthly payrolls above $250,000. That figure jumps to 95% for firms with more than 250 employees.
But only 20% of the country’s roughly 33 million small businesses have employees, according to the Small Business Administration, which means few have significant payroll costs that can push their deposits above $250,000.
And just 5% of companies are sitting on war chests from investors. “Silicon Valley Bank wasn’t banking small businesses on Main Street, USA,” said Aaron Klein, senior fellow in economic studies at the Brookings Institution. “They were banking tech startups primarily 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, when nearly 500 banks collapsed from 2008–2013. But they can happen at any time. A 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 folks to ask: ‘What type of bank am I banking 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 is specialized in a unique or higher-risk industry.”
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. Regulators usually take over failing banks on Friday afternoons so the Treasury Department can spend the weekend sorting everything out. By Monday, depositors usually have access to their funds.
Small-business owners should instead focus on their day-to-day operations. “Go back to worrying about your business,” Klein said. “When a bank fails, the government is there lickety-split.”
I have more than $250,000. Should I open multiple accounts?
You can have as many accounts at one bank as you want, but any balance in excess of $250,000 across all of your deposits will not be 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. That means one depositor can be insured as an individual and as a business. In Wirt’s case, for example, she would be covered for 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 will be insured.
However, having multiple signers on a business account does not increase the 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 each depositor at each institution, so spreading your wealth offers more coverage. Having a second banking relationship also makes it easier to quickly wire funds to safety if you worry that your bank may be unstable.
“Always have a backup strategy; hope is not a strategy,” said Jeni Mayorskaya, founder of Stork Club, which creates reproductive health benefits packages that companies can offer their employees.