How Small Businesses Can Find Safety Before the Next Bank Crisis

How Small Businesses Can Find Safety Before the Next Bank Crisis

Last month the collapse of two regional lenders, Silicon Valley Bank and Signature Bank, sparked a wave of panic among small businesses across the country as owners watched the news and wondered whether their assets were safe – even if their deposits Don’t be in one. Failed Institute.

Now that the panic has begun to subside, advisors are recommending that small businesses check their accounts to determine their risk levels and protect their deposits from future bank failure.

when melissa wirt started tied up mommaAn e-commerce company that sells apparel for nursing mothers did it by taking a loan from her personal savings — As do most small-business owners, She opted to set up a business account at Atlantic Union Bank because she had personal accounts there, making it easy to transfer funds if her business needed cash.

Plus, he liked his 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 keeps more than $250,000 in the bank, but during the recent banking turmoil, she worried that if Atlantic Union also failed, she wouldn’t be able to make the $60,000 bi-weekly payroll for her roughly 40 employees. Will be able to So he opened another business account in a big bank.

Experts say most small businesses face little risk in a bank failure. The Federal Deposit Insurance Corporation insures deposits of up to $250,000, and most small businesses probably keep less money in the bank than that. The JPMorgan Chase Institute surveyed its 600,000 small business account holders and found that they have average cash balance of only $12,100,

Two things can change that risk assessment: being an employee or being funded by venture capital.

Payroll costs are one of the biggest expenses for most companies. Gusto, a payroll and benefits provider to more than 300,000 small businesses, said nearly half of its customers with 50 to 99 employees had monthly payrolls in excess of $250,000. This figure rises to 95 percent for firms with more than 250 employees.

but only 20 percent of the country about 33 million small businesses employees, according to the Small Business Administration, meaning some have significant payroll costs that could push their deposits above $250,000.

And only 5 percent of the companies are sitting with war chests from the investors. “The Silicon Valley banks weren’t banking small businesses on Main Street, USA,” said Aaron Klein, Senior Fellow in Economic Studies at the Brookings Institution. “They were primarily banking tech start-ups with venture capital backing.”

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. A recent research paper suggests that about 200 banks are at risk based on the same conditions that brought down Silicon Valley Bank: risk from rising interest rates, as well as high levels of uninsured deposits.

“I think it’s an interesting time for people to ask: ‘What type of bank am I banking with?'” said Rebecca Romero Rainey, president and chief executive officer of Independent Community Bankers of America, a trade group. Said. “The risk profile is going to be very different for a bank that is specialized in a unique or high-risk industry.”

As long as your deposit is insured by the FDIC, your risk is limited to inconvenience and delay. Regulators typically take over failed banks on Friday afternoons, so the Treasury Department can spend the weekend getting everything in order. 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,” Mr. Klein said. “When a bank fails, there is a government split.”

You can have as many accounts as you want at one bank, but any balance that exceeds $250,000 across all your deposits will not be insured. FDIC limits per depositor, per institution – not per account,

However, there are some nuances.

Business accounts are insured separately from personal accounts. This means that a depositor can be insured both as an individual and as a business. In Ms. Wirt’s case, for example, she would be covered for up to $250,000 for her latched maternal 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 a joint account and $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, Ms. Rainey said.

It is always a good idea to diversify your holdings. The FDIC insures every depositor at every institution, so spreading your money provides more coverage. If you have concerns that your bank may become unstable, having another banking relationship makes it easier to secure funds quickly.

“Always have a backup strategy; Hope is not a strategy,” said Jenny Meyerskaya, founder of Stork Club, which creates reproductive-health benefits packages that companies can offer their employees.

It has raised over $30 million from investors and was encouraged to keep its funds in a Silicon Valley bank. But when he heard whispers that the bank might fail, he 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’ve learned that you always have to have a diversification strategy.”

Banks can reduce risk through the IntraFi network, a system that can split large customer deposits into smaller pieces of less than a $250,000 limit. It then sends those portions 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 this happens.

In the first case, banks cut off customer money in CDs of less than $250,000 and keep those accounts at other institutions. CDs earn interest, but the downside is that the money cannot be withdrawn without penalty before the CD matures.

The second option is a sweep account, in which a customer’s balance of more than $250,000 is “swept” to other IntraFi network banks in small blocks every night.

With either option, these deposits are protected by the FDIC because they are technically sitting elsewhere.

“It’s been more relevant in the past few weeks,” said Matthew Burke, chief executive officer 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 100 percent FDIC insured.”

This service is free but relevant only for businesses with uninsured deposits. For Cape Cod 5, that means less than 1,000 of its more than 100,000 customers. Mr. Burke is reaching out to those customers to open sweep accounts. Some refused, saying they were comfortable with the bank’s track record.

But others, such as accounting firm Glivinski & Associates, are using the service. Because Glivinski handles financial matters for its clients, it needs access to cash, and sweep accounts allow it to have operating capital and carry insurance.

Gliwinski has been referring her clients to Mr. Burke to set up sweep accounts. “About 80 percent of our clients are nonprofits,” said Valerie Silva, Gliwinski’s chief operating officer. “He even has more than the FDIC limit in the bank because his budget is in the millions.”

The collapse of the Silicon Valley bank caused an unexpected windfall for small businesses as many payroll processing firms that banked there had their funds temporarily frozen while federal regulators resolved the mess. Meanwhile, those companies could not cut the salaries of their clients’ employees.

One of the lessons Ms. Wirt, the owner of Latched Mama, learned was this: Ask where your service provider banks. He was glad to find that his payroll firm, Gusto, had backup. If it got caught in the collapse of the bank, 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 chief financial officer.

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