The dramatic news about Silicon Valley Bank (SVB) and Signature Bank of New York (SBNY) served as a wake-up call to many small- and mid-sized businesses (SMBs). On the day regulators stepped in, many customers couldn’t access their cash deposits or credit lines to fund their operations. Some couldn’t meet payroll. Even credit cards stopped working.
Though the Federal Reserve Bank soon agreed to back all deposits, that initial period of uncertainty—while the banks’ operations remained frozen—demonstrated the need for resilience in financial operations. Companies that have weathered the storm have learned these lessons.
Lesson 1: Don’t put all your eggs in one bank.
The companies that were best able to ensure financial continuity were the ones that worked with multiple banks. A New England land management company, for instance, reportedly reached out to another banking partner to help them pay employees and vendors after regulators froze their SVB accounts.
Spreading your business among multiple financial institutions makes sense even under non-extraordinary circumstances. Every bank has unique strengths. Working with several institutions, allows your business to have best balance of personal service, financial products, and pricing.
For instance, if you do business internationally, you may need a bank that’s strong in foreign exchange and trade finance services. However, that bank may not necessarily be the best fit for day-to-day payment processing or merchant services. And sometimes, you may just need to use a bank because of its location, especially if your business makes frequent or substantial cash deposits or withdrawals.
If your needs are complicated, building relationships with banks that offer best-of-breed products will give you access to their expertise and services.
It also gives you resilience. If, for some unforeseen reason, you need additional financial flexibility, having multiple banking partners gives you options.
Lesson 2: Actively Manage Your Rainy Day Reserves
The U.S. Treasury, Federal Reserve Bank, and Federal Deposit Insurance Corp (FDIC) took a very unusual step in managing the closures of SVB. The Sunday after the bank closed, they announced that depositors would have access to all their money the next day. One business day after SVB closed.
Future customers of banks in similar situations may not be so lucky.
Generally, the FDIC gives large depositors a receivership certificate for their uninsured funds. This certificate is a claim on the bank’s assets. Of course, there’s no guarantee that depositors will recover the total value of the certificate. And holders may need to wait until regulators sell the bank or sort out the mess before they can access the funds.
Who knows how long that will take?
(On March 19, New York Community Bancorp agreed to buy SBNY. Without the intervention mentioned earlier, SBNY would have had to wait for the deal to close before they found out the status of their accounts.)
Many SMB owners now realize they don’t want to get caught in a situation where the money they need is tied up. If you’re small enough and have the resources to manage it, consider dividing your cash between multiple sub-$250,000 accounts so all your reserves are FDIC insured.
According to the Wall Street Journal, some SMBs are “moving funds to other institutions, splitting them between multiple banks, moving cash into money-market funds or buying Treasurys.”
Rainy day reserves backstop your company against all kinds of financial snafus. Everything from equipment failures to cybersecurity breaches to unexpected liens claims against assets.
Don’t take chances with your reserves. Make sure they’re adequate and adequately diversified.
Lesson 3. Give Your Banks a Quarterly Checkup
Banks analyze you. But most company executives don’t know how to evaluate a bank’s financial health, and those that do (CFOs, finance directors, etc.) rarely have the time. Still, you can choose resources to track and score a bank’s safety.
Many CFOs use Standard & Poor’s, Moody’s, and Fitch Ratings to check the credit of vendors and customers, including commercial banks. They’re the 800-pound gorillas in the rating space. There are also some smaller companies that gather publicly available information and aggregate them into valuable reports. Some may be relatively inexpensive.
Bauer Financial: Bauer offers a basic five-star rating system for free. You simply type in the bank’s name to see how it’s rated. The safest banks get five stars; troubled banks get one. After seeing the star rating, you can click “Tell Me More” and purchase detailed reports on the bank’s historical finances.
Veribanc: According to their homepage, Veribanc uses an actuarially based system, and the reports are approved for use by several insurance companies. A wide range of reports is available, including their WatchList. This report lets you track multiple institutions’ safety ratings and the financial measure behind the score. There’s also a simple, do-it-yourself test that tells you how likely bad loans are to bring your bank down. It’s called the Texas Ratio. You simply divide the bank’s non-performing assets (loans that are delinquent or in default) by the sum of the bank’s tangible common equity and loan loss reserves. The closer the total is to one, the higher the odds the bank is in trouble.
Lesson 4. Get Creative with Financing
If you find yourself in a credit crunch, you can get creative. A New York toy company reportedly turned to its customers for help. In an email, they explained that most of their operating capital was at SVB and asked customers to help keep them going. They offered the promo code “BANKRUN.”
Peer-to-peer lending and crowdsourcing may also work in certain circumstances.
Sometimes the circumstances surrounding a bank failure can leave your company too weak to work with traditional banks. If necessary, you may need to issue equity to raise capital.
You may also consider talking to a non-bank financing source like a business development company (BDC). BDCs provide debt and equity financing to small- and mid-sized companies. However, because they take on risky situations, their rates and fees tend to be higher than traditional banks. Also, be sure to read (or have your lawyer read) the fine print. BDCs aren’t regulated like banks, and a few unethical players have been known to hide onerous terms in their contracts.
Lesson 5. Work with Well-Capitalized, Financially Stable Vendors Like PEX
PEX is a well-capitalized, financially stable company unaffected by the events surrounding SVB and SBNY. We’ve been helping organizations gain control of staff spending for more than ten years. All customer assets are held by Fifth Third Bancorp (NASDAQ: FITB) and The Bancorp, Bank, N.A., Member FDIC (NASDAQ: TBBK).
PEX gives you an automated spend management system that lets you build spending rules and enforce them automatically. It also scales to thousands of cardholders and integrates with your business and accounting systems, so you gain unparalleled flexibility and control over staff spending and automated vendor payments.