How to Protect Your Business During a Banking Crisis
The collapse of Silicon Valley Bank set off a wave of panic about the banking industry, and American businesses aren’t out of the woods yet. Here are three ways to protect your business from the banking crisis.
Business owners have many worries that keep them up at night, but until recently, the risk of a bank run wasn’t one of them. The collapse of the relatively small, niche Silicon Valley Bank (SVB) could have been dismissed as an outlier, but with the collapse and takeover of Credit Suisse, a huge global bank with a 168-year history, it’s clear that no bank customer is safe.
It will be a long time before that sense of unease disappears. The CEO of JPMorgan Chase, the largest bank in the U.S., recently admitted the banking crisis is not over and that there will be repercussions for years to come. Here is what that means for small and mid-sized B2B companies, and how owners can minimize their exposure to risk.
Evaluate your bank
Just as your bank conducted due diligence before entering into a business relationship with you, you can conduct due diligence before choosing to trust your money to them. Getting a better sense of their risk profile can help you make more informed choices about how to keep your money safe.
Here are a few risk factors to explore.
Is your bank insured?
If your bank is insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration, you can take comfort in the fact that up to $250,000 of the money you have on deposit is insured, a guarantee that is backed by the US government.
What is your bank’s concentration risk?
As we saw with SVB, when a bank’s relationships are concentrated in a specific industry, it can open the bank to significant risk. Ideally, your bank will cater to a diverse customer base that includes businesses of all types and sizes.
What is the bank’s financial risk?
You can find verified details on a bank’s financials, including assets, liabilities, and capital, asset diversification, and other key data about their financial health by searching the FDIC database.
What is the bank’s Moody’s rating?
Moody’s provides a Bank Financial Strength Rating (BFSR) for every bank, from Aaa (minimal risk) to C (high risk). When a bank’s rating is low or has been downgraded, it signals that the institution may be at risk of a collapse.
Note that a good rating from Moody’s is not a guarantee of stability: Moody’s gave SVB an A rating—a relatively positive score—before it collapsed.
What is the bank’s cyber risk?
In 2022, 63% of financial institutions experienced an increase in destructive attacks, and the majority are planning to significantly increase their investment in cybersecurity. Ask your bank what protections they have in place against cyber-attacks.
What is the bank’s exposure to cryptocurrencies?
Cryptocurrency has had a destabilizing effect on the economy, and regulators and economists have begun warning banks to limit their exposure to crypto assets. However, there are no official limits banks need to adhere to, so it’s worth asking your bank about its level of exposure.
Diversify Your Banking Relationships
One of the most important steps you can take to protect your business is to diversify your banking relationships by relying on more than one financial institution to manage your finances. Using multiple financial institutions mitigates the impact that a bank failure can have on your operations and finances. It could also reduce your losses if you routinely maintain balances above $250,000. It could also give you more bargaining power when negotiating loan terms and other financial services.
Build Up Your Liquidity
A business’s liquidity is heavily reliant on its banking relationships. Banks not only hold a business’s cash deposits but also provide access to loans or lines of credit that give businesses the cash they need to operate.
By holding deposits, loans, and lines of credit with more than one bank, you can ensure that if one bank collapses, your business will still have access to cash.
Alternative forms of financing that are secured outside of the banking system can also help businesses stay liquid. While online loans and merchant cash advances charge high interest rates and fees, financing options such as invoice factoring, mobilization financing, inventory financing, and purchase order financing all offer ways to accelerate cash flow more affordably.
Prepare and Survive
The consensus is that the U.S. banking system is stable and sound. The likelihood that you will ever be faced with the sudden and permanent closure of your business banking institution is very low. But as we have seen, it can happen, and the consequences can be devastating.
The collapse of SVB may seem like an outlier, but nearly 200 banks have similar risk profiles. Meanwhile, a volatile economy and the destabilizing impact of cryptocurrencies are placing even greater pressure on the banking system.
Performing a little extra due diligence on your banking partners, diversifying your banking relationships, and exploring alternative financing options that exist outside the traditional banking system can help to protect your business from the effects of a banking crisis.