Bank busts a cautionary lesson for small-business depositors

The multiple failures within a short period of time of Silvergate Bank, Silicon Valley Bank (SVB) and Signature Bank, cast uncertainty over the banking sector. 

But from bad situations comes lessons learned, and experts say small businesses should take these debacles as a way to shore up their own finances and banking relationships.

“This is potentially a warning sign to small businesses,” says Anoop Rai, a professor of finance at Hofstra University in Hempstead.

Specifically, if your business has more than $250,000 in one account and your bank fails. you may not be able to meet certain payments like payroll and suppliers right away, he says.

Rai is referring to the FDIC (Federal Deposit Insurance Corporation) insurance limit, which protects bank customers in the event that an FDIC-insured depository institution fails, he says.

Deposits are insured up to at least $250,000 per depositor, per FDIC-insured bank, per ownership category, says Marguerita Cheng, a certified financial planner and founder of Blue Ocean Global Wealth, a Gaithersburg, Maryland-based financial planning and investment advisory firm.

So for example, a couple that own a business could have $250G insured individually under each of their names, and then also in a joint account, and then, say, in a business account, she says.

While Congress has discussed raising that limit, it’s what exists presently.

In the case of Signature and SVB, even uninsured deposits were protected above the $250G deposit insurance limit by the federal government to shore up confidence in the broader banking system,, but it’s yet to be seen if that will happen if more failures occur down the line, Rai says.

“You can’t keep bailing out all the banks,” he says. “That can’t be good for taxpayers.”

He suggests small businesses if they have over $250,000 in one account consider spreading funds above the $250G threshold into other banks.

While that may seem cumbersome to have money in multiple banks, it could hedge risk, Rai says.

Cheng agrees, noting, “it’s certainly advisable to have different banking relationships.”

This is particularly relevant for capital intensive industries like the construction industry that may have large sums of capital they keep in accounts, she says.

The bottom line is “businesses need to make sure they have adequate liquidity access,” she says.

Yet some businesses see adding accounts as a hassle instead of a prudent hedge, says Michael Hanley, managing partner of Michels & Hanley CPAs LLP in Northport.

“The biggest pushback I’ve heard over the past 20 years is that it’s just too big of a headache to open and manage multiple accounts at multiple banks,” Hanley says.

His advice: “In the face of a bank failure, the small headache of opening another bank account and receiving an extra set of bank statements is nothing compared to the large headache you could be in store for when it comes time to either lose a large portion of your life savings or have a large portion of your life savings tied up in receivership.”

Thankfully, with the latest bank failures, Hanley says his clients had minimal exposure.

“The handful of clients that banked with SVB were well-diversified and had enough operating capital on deposit with other banks to weather any issues,” he says.

He had a dozen or so clients that banked with Signature, but Signature Bank and its successor, the Signature Bridge Bank, which the FDIC created to take over the closed bank's operations, “handled everything beautifully with minimal downtime, transparency, and quick access to funds,” Hanley says.

The episode still should make you consider your overall banking relationships.

Businesses should start asking some key questions of their banks, says Jude Boudreaux, a certified financial planner and senior financial planner at The Planning Center in New Orleans, a financial planning firm.

“If they don’t have good confident answers for your questions, as a business owner, that’s a huge warning sign for me,” he says.

Some questions to ask, he says:

• What’s the business mix of the bank and is it concentrated in one or a handful of industries? (Silicon Valley, for instance, was a significant lender to high-tech, crypto and digital health-care startups.)
• What risk management processes is it putting into place if there were a run on deposits, which is what happened at both Silicon Valley Bank and Signature Bank; and
• How is the bank prepared for what could be a bad scenario if a major depositor pulled funds suddenly?

“I think if you’re a business and you have more than $250,000 in cash, it’s worth getting answers to these questions,” Boudreaux says. “Until protections are increased we have to invest the time to protect these cash deposits.”

By Jamie Herzlich

jherzlich@aol.com

Herzlich writes the Small Business column in Newsday.