How to keep your business deposit safe during a banking crisis

You might think that small businesses with accounts above the average depositor’s $250,000 federal deposit insurance limit would be worried about the U.S. banking system. And you would be right.

The past two months have been tough for the U.S. banking system: As depositors lost faith in the stability of banks and withdrew their money, three fast-growing regional banks failed in succession, leading to more than $100 billion in withdrawals from First Republic Bank and its eventual sale. to JPMorgan. JPMorgan CEO Jamie Dimon declared that “this part of the crisis is over” after his bank’s settlement, but volatility in regional bank stocks continued Thursday as shares of PacWest fell.

But when it comes to financial relationships and risks, small business owners have other concerns on their minds. First, higher interest rates and greater difficulty in accessing capital, including loans for growth. And with prices high on many key business inputs, even with the best of intentions, rushing to switch financial institutions as part of risk management can lead them to overpay in bank account fees and sacrifice valuable, high-touch relationships.

Small business owners are now evenly split between those who trust America’s banking system and those who don’t (49% vs. 50%), according to Group 2 of the CNBC|SurveyMonkey Small Business poll released Thursday morning. The majority (62%) say they are confident that their business capital is secure. But fewer (53%) say access to the capital they need to run their businesses is easy. A further tightening of credit is expected after the failure of three banks and another interest rate hike by the Federal Reserve is expected on Wednesday. pushing business loans firmly into double-digit interest territory for many borrowers, concerns will continue.

Kirsten Quigley, CEO of Lunchskins, a Bethesda, Md.-based company that sells environmentally friendly sandwich wraps, said interest rates on the loans Lunchskins uses for working capital have more than doubled in the past year. “When you finance your development with that kind of debt. It really affects your cash flow,” Quigley said.

The regional bank he used, Eagle Bank, is nowhere near the “too big to fail” category.

But he appreciates the personal attention he gets for his firm, which was founded in 2008 and is now in more than 13,000 grocery stores nationwide, including Walmart, Target and Kroger. In March, the CEO of Bethesda-based Eagle Bank, which has 14 locations, sent a note to customers saying they had enough reserves. “It’s a physical office and a physical person,” Quigley said. “When I call, they call me back.”

Small businesses can feel like they’re up against a wall. They don’t have the luxury of great business leverage to negotiate a special deal on interest rates and fees, or the time to keep up with financial services.

But there are steps small businesses can take to manage financial services relationships that balance risk, cost and time.

Always watch for interest offers.

Quigley monitors interest rates, so he knows that even though rates are high, what he’s getting from his local bank is competitive.

According to a CNBC survey, small business owners are almost evenly split among banking institutions by size. About 40% of small business owners say they do their business banking with a large bank. Almost equal percentages work with regional banks (31%) and community banks (32%).

Security of deposits is a concern, but not a major one.

Security is a concern, and the PacWest headlines sent more jitters through the market, but overall, data from the national banking system shows that deposit security is a declining problem. After three bank failures, some depositors took money out of small and regional banks and put it in larger banks. Outflows stabilized by the end of April, falling just 1% at the 850 smallest banks, according to deposit data from the Federal Reserve Board.

A CNBC survey shows that a majority of business owners (71%) do not plan to open new accounts in the next year, while 43% say they transfer money as often as they did a year ago.

Bank size matters to business owners.

This does not mean that no distinction is made by the owners according to the size of the bank. When asked whether access to the necessary capital is easy now, percentages fall from a large bank customer (59%) to a regional bank customer (56%) and a community bank customer (50%), according to the survey. There is a similar small and noticeable trend line regarding confidence that their business capital is reliable: 67% among large bank customers; 66% among regional bank clients; and 60% among community bank customers.

“There’s a run to the bigger banks,” said Eleni Delimpaltadaki Janis, CEO of Equivico, an influencer investment firm that provides capital to responsible lenders to increase fair lending to small businesses.

Big banks are not necessarily the best choice.

Janis at Delimpalta doesn’t think the biggest banks are the best choice for most small businesses. “That’s not what they’re interested in banking on,” he said.

In fact, the CNBC survey found that the minority of business owners planning to open a new account in the next year are almost evenly split between large (30%) and those planning to do so with a regional or community bank. 28%).

“On the other hand, you have to protect your money,” said Janis of Delimpalta.

He advises small businesses concerned about security to look for a bank that offers an insured cash-clearing account. If your balance exceeds the federal insurance cap of $250,000, the money will automatically be transferred to other institutions, increasing your cap by two to five times.

Note that after three bank failures, the Federal Deposit Insurance Corporation recommended that the federal government expand its insurance program for business accounts.

There isn’t much a small business can do about a rising interest rate environment. But you can first look for banks that are more likely to approve your loan or extension, or work with you to find the right line of credit. Small business owners say that emotional support and time saved to connect with people is an undervalued commodity.

“I bank with CommunityAmerica Credit Union,” said Isaac Collins, owner of three Yogurtini franchises in Kansas City, Missouri, via email. “This is a local credit union in KC and I LOVE my experience with them…I have a whole team to serve me in the area I want without having to go to a local branch. It gets a lot of my loans. I’m back from a very busy time!”

Review the bank’s loan approval rates.

If you cut your ties with a smaller bank in the interest of safety, you may decrease your chances of being approved for a loan. According to the Federal Reserve’s 2023 Small Business Loan Survey, although more small businesses apply for a loan at a higher interest rate than a large bank, small banks and alternative lenders, including online lenders, approve loans at higher interest rates than large banks. 82% of loans were approved in small banks, and 68% in 25 largest banks. Online lenders and finance companies were at 76% and 71% respectively.

Be wary of credit card offers as a substitute for credit.

In a higher interest rate environment, banks are trying to sell more credit card financing to small businesses. There are valuable suggestions; Some bank credit cards offer travel and cash rewards. But in the current rate environment, which has seen the Fed raise rates from 0% to 5% within a year, credit card debt can come with interest rates in excess of 25% per annum. “Credit cards can be expensive — they will be especially so in a rising interest rate environment,” said Andy Schmidt, vice president and global head of industrial banking at CGI, a Montreal-based IT and business consulting firm. “One must be careful.”

Look for interest on cash accounts.

Nowadays, everyone is chasing higher interest rates on accounts. This isn’t specifically a business owner phenomenon, individual savers can avoid low-yielding large bank deposit accounts for money market funds and other high-yield offerings in the 4%-5% range, locking up money for longer without liquidity. problem. According to a recent estimate offered on CNBC, up to $1 trillion could be pulled out of bank deposit accounts as investors and savers seek higher returns, not for safety reasons.

For business owners who can’t afford a lower interest rate or a working line of credit, today’s flexibility in financing offers and the ease of transferring money between financial institutions managed by Silicon Valley Bank, look for a higher interest rate on the cash you keep in your accounts. As a small business, your accounts may average tens or hundreds of thousands of dollars; That money can earn up to 4% interest, Schmidt said.