Many small business owners were surprised this week when they turned on the news and learned that some of the nation’s largest banks have gone into bank failure. It was even more shocking to learn that the bank failure of Silicon Valley Bank (SVB) and Signature Bank represented the second- and third-largest bank failures in United States history.
These uneasy statistics in such a short amount of time have made small business owners worried about volatility in the U.S. financial system and the greater economy. Aside from the recession fears that might be produced by a new 2008-style recession, small business owners are also concerned about the assets that they may have held in SVB or the assets they are holding in other banks. In short, this recent financial news has worried small business owners who are already dealing with the stress of managing their businesses with other current economic challenges, such as inflation and labor shortages.
If you are a small business owner and are interested in how the SVB collapse will likely affect your small business, its operations, and its assets, you have come to the right place. We will give you the background behind what happened, who was affected, the impacts on businesses like yours, and the efforts of the government to help save small businesses as a result. In the way of solutions, we will discuss future areas of concern for your small business as a result of these events and the short-term liquidity options available to your small business. We’ll cover the following subjects in depth in this article:
Silicon Valley Bank, or SVB, was a large bank in the United States focused on being a lender to the tech industry. As a bank, they accepted deposits from general consumer depositors, small businesses, startups, and businesses like private equity and venture capital firms. SVB took on a relatively risky strategy as a lender by lending broadly to the tech sector, including startups. Since many tech startups, such as those dealing with crypto, are not necessarily profitable or heavily reinvest in their growth, there was a lot of risk in the loans that SVB was making.
At the same time, one of the common ways that banks have been hedging their risk is in treasury bonds offered by the US Treasury. For over the last ten years, the United States economy has had incredibly low-interest rates, which spurred a bull market in the stock market and investment into other classes of assets. As a result, the demand for US treasuries was low, and so were interest rates. Moreover, interest rates were also kept low by the Federal Reserve.
This strategy did not stop for the Fed even during the pandemic. Rather than making expected rate hikes, the Fed decided to keep interest rates low out of fear of a potential recession and to avoid an economic shutdown. Everyone knew that, eventually, interest rates would go up, but it was not known when and by how much. At the same time, the banking sector kept acquiring US treasuries as a way to hedge their bets.
Problems started to form when the Fed finally started hiking interest rates due to inflation. The rapid rise of inflation in the US economy prompted the government to raise interest rates to slow down its effect. However, as the interest rate rose, the US treasuries that people currently hold dropped massively in value. The result was that these bonds became massively devalued on the balance sheet of banks. With concerns about the devaluation of their assets, especially for banks like SVB, they attempted to shore up their balance sheet through a capital raise via equity in the stock market. This news ultimately triggered their collapse.
In response to this news, shareholders of SVB rushed to sell their bank stocks so that they could recuperate as much of their capital as possible in the event of the collapse of the financial institution. At the same time that this news was making headlines to shareholders, companies, and people that held assets in SVB began to worry and rushed to withdraw their money. As a result, SVB did not have enough money left to cover its positions, and the bank failed, shutting down. In the days that followed, other banks like Signature Bank came to fail. US financial regulators and Treasury Secretary Janet Yellen have been formulating a response to preventing a complete banking system collapse through regulatory means.
Who Was Affected?
In the immediate collapse of SVB, many different parties were affected. First, shareholders in SVB stock saw their positions drop in value immediately. Other banking stocks and the US stock market saw their market capitalization drop substantially. Many in the United States have become worried about a financial collapse and what that would mean for their positions, both held in the stock market and banks.
Depositors in SVB were greatly affected too. Rocked by the same uncertainty of what would happen to their funds, depositors, from consumers to companies, began worrying about the government’s response. SVB was also popular as a bank for small businesses, which were a major vulnerable party following the collapse of SVB. This is primarily because of the default response that consumers and companies are aware of in the event of a bank collapse.
Banks like SVB had their depositors insured through a US government program known as the FDIC, or Federal Deposit Insurance Corporation, which helps insure depositors of their funds in the event of a bank collapse. The FDIC insures deposits up to $250,000, which can help a lot of regular consumers if they are affected by a bank collapse like SVB’s collapse and cannot retrieve their funds. The FDIC will take control of their deposits and insure up to $250,000 per type of account per depositor per insured bank.
You may be able to see the problem for small businesses, though. If your small business is somewhat large, you may have more than $250,000 in your bank account. Moreover, you may not keep multiple accounts at different banks to simplify your financial transactions. As a result, small businesses may be opened up to some risk. In addition to the theoretical implications, the percentage of deposits covered by FDIC at SVB was less than 20%.
The potential impacts of this could spill over. With other firms losing assets that they thought they had and the fear of this spilling over to other banks, some people will go to banks and withdraw their money and other borrowers will not be able to pay back their lenders. This chain reaction threatens the stability of the country in potentially inducing a financial crisis as well as the health of small businesses, their assets, and the financial services available to them.
Potential Impacts of the SVB Collapse on Small Businesses
The potential impacts of the SVB collapse on small businesses generally fall into two categories: the immediate impacts of the SVB collapse and the potential impacts on small businesses depending on government action and market conditions.
Some of the impacts we know for sure about are due to recent government announcements from Biden Administration and other financial regulators.
First, starting with the immediate impacts of the SVB collapse, we know that the insurance of deposits at SVB will extend far beyond insured depositors. First, if your small business was insured by the FDIC, the aftermath of the bank collapse will not affect your asset total. It will only be a slight hassle to recover your funds after a few days from the FDIC. However, there is also good news for uninsured depositors.
If your small business held more than $250,000 with SVB, your bank deposits will also be covered by the FDIC. This can help you be confident in your ability to continue operating. While this was a one-off decision by the US government to cover deposits over $250,000, it is generally not a good idea to keep all of your funds in one bank if you are concerned about a bank failure like the Silicon Valley Bank collapse.
As a result, the only challenges that this will likely create for your small business if you held bank accounts at SVB are operational challenges involved in needing to wait a small amount of time for access to your deposits and the eventual challenges in setting up a new way of making and receiving payments through a new bank account, if relevant.
However, there also may be some longer-term consequences of the SVB collapse felt by small businesses, depending on government action and market conditions. Other banks like US Bank or JPMorgan may begin to experience more pressure on their balance sheets from US treasuries, rising interest rates, panic leading to withdrawals, and more hesitant depositors. Regional banks with smaller balance sheets and financial prowess may also experience similar challenges to SVB. The type of bailout will also likely increase inflation due to the protection of SVB’s failed balance sheet.
As a result, small businesses may have to deal with additional bank failures and inflation, depending on how the government decides to respond to the problems which affected SVB and other banks. These can prevent logistical challenges, financial risks, and pricing problems for small business owners. Unfortunately, small business owners should pay attention to the financial sector and the performance of banks and the American economy as it relates to inflation in the coming months and take steps to ensure that they and their profits are protected.
Government Focus on Protecting Small Businesses
While many of the precedents in U.S. history for bailing out failing banks date back to the 2008 financial crisis, the extent to which the US government will be able to protect small businesses is unclear. The FDIC has already helped by protecting uninsured depositors, which has helped vulnerable small businesses. However, if other banks shut down soon, they may not be able to help cover uninsured depositors.
Another concern for small businesses related to government regulation may be if your small business has a substantial position as a shareholder of one of the large banks. President Joe Biden has already stated that the US will not reimburse shareholders who lost their money investing in banks like SVB. As a result, your position may be lost in a bank that fails. You should consider moving your money out of bank stocks if you think that the bank that you have a position in is at risk of going under.
Future Areas of Concern for Small Businesses
The collapse of SVB provides small businesses with some warning signs of economic conditions that could heavily impact the operations and profitability of your small business. You need to be aware of watching certain things so that you can adjust your short-term liquidity options and your business plan to account for potential issues.
You should pay attention to news about the financial industry in the coming months. Assess the health of banks that you hold bank accounts with and also pay attention to the health of small banks that you may have positions in.
You should also be concerned about inflation and the effects that it will have on prices for your business, wages for your employees, interest rates on your loans, and the value of any bonds you may hold. Moreover, layoffs at large banks may put some downward pressure on spending in the macroeconomy. As a result, your small business may need to be prepared for decreased spending, spending volatility, or increased difficulty in getting financing.
How to Protect Your Small Business from Bank Runs and Short-Term Liquidity Options
One of the key takeaways that small businesses are hoping to get out of the SVB collapse is how they can better manage and protect their assets if their bank collapses.
The most important metric to pay attention to is the maximum insured deposit amount of $250,000 by the FDIC. If your small business consistently has less than $250,000 in your bank, you probably do not have too much to worry about in terms of losing a substantial amount of your assets. However, since there can be a delay in getting your funds after a bank failure, you may want to have a second or third bank account to be able to draw funds from in the meantime.
Moreover, if your small business has more than $250,000 frequently stored in cash at a bank, you may want to make additional bank accounts at other banks and spread the amount over as much as operationally possible so that you are not vulnerable to being an uninsured depositor to the extent that that is possible.
Choosing the right bank is important, too, in order to provide good liquidity options to your small business. Choosing a major bank like JPMorgan, Wells Fargo, Bank of America, or Citi can help protect your assets likely better than riskier banks like SVB. Although regional and small banks may be able to help your small businesses in certain cases, diversifying your bank account options for your small business to major banks in America can be a great way to ensure that your small business cash has a bit more liquidity than a singular non-major American bank.
Shoring Up Cash Flow with Financing
While the federal government is guaranteeing all of the accounts at SVB, even those that are over $250,000, with a special provision in the FDIC, you may still find yourself needing to shore up cash flow or increase liquidity during this time. If that is the case and you need financing quickly, alternative lenders, like us here at Biz2Credit, can be a great way to do so.
With a wide array of term loans, lines of credit, merchant cash advances (MCAs), and other financing options, alternative lenders can often get you funding in as little as 24 hours. This can be a real game changer for businesses in a tight cash flow pinch. If you are in a situation in which you need to increase cash flow, be sure to check out these options and see what makes sense for your business. There’s no need for an otherwise healthy business to succumb to cash flow issues when there are so many quick and easy financing options available to small businesses today.
At Biz2Credit, we understand how challenging it is to build and run a successful small business. It takes hard work, dedication, and resourcefulness. That’s why we work hard to provide small businesses with a wide array of resources and tools they can utilize in their efforts to run an efficient and effective operation. As part of this, we run our Biz2Credit Blog, where we post new articles each and every weekday on all the latest news, trends, and events impacting small businesses. So, please continue to check back here daily for the latest posts!