What The Silicon Valley Bank Debacle Means For Your SMB
Once a celebrated entity that helped fuel technology-related startups, Silicon Valley Bank (SVB) has been making headlines for all the wrong reasons. With federal action necessary to restore public confidence in the US financial system and prevent additional failures and broader panic following the prominent financial institution’s collapse, there are lessons for small and midsize businesses (SMBs).
How Did SVB’s Collapse Impact Others?
Larger firms—such as Circle, Etsy, Rippling and Roku—found themselves facing direct threats due to their having either parked large amounts of money at SVB or having become dependent upon the institution in some capacity (such as through other vendors) to process payments. The primary challenge for SMBs, however, is to determine how best to safeguard funds and avoid the exposure and risks numerous other companies and financial institutions experienced because of their SVB dependence.
How Are SMBs Impacted?
According to multiple and widespread sources, SMBs should review their banking practices and consider eliminating dependence upon any one financial institution. A frequent and recurring recommendation surfacing within published guidance for companies to adopt, following SVB’s trouble, is organizations diversify their banking relationships. By distributing deposits and funds across multiple separate banks, SMBs can help protect their cash by virtue of the corresponding FDIC limits that typically safeguard the first $250,000 on deposit. General Catalyst CEO Hemant Taneja, who Time magazine describes having “topped many people’s lists as a voice of reason in Silicon Valley” during the SVB crisis, specifically recommends diversifying across a mix of large and regional banks.
A banking diversification strategy presents one key potential drawback, though, that should not be overlooked. When building ties with multiple banks and financial professionals, an SMB runs the risk of undermining its own ability to create more comprehensive and deeper relationships with a primary bank. Closer and more interconnected banking relationships can pay dividends, such as occurred when organizations pursued the US Small Business Administration-backed and forgivable Paycheck Protection Program loans that arose during the pandemic and bankers proved an important component in helping process and land.
Regardless of the number of banks with which a firm works, strategic finance consultancy Embarc Advisors‘ president Jay Jung reminds businesses of the importance of maintaining accurate cash forecasts and financial strategies. Jung advocates building 30-, 90- and 365-day funding plans. Redundant accounts and payment processing strategies should be integrated within those plans, too, he advises. Being prepared for contingencies, such as a frozen payroll, only helps SMBs to be better positioned to navigate crises in the event such an issue arises.
It’s also important for an SMB to protect its daily operations from interruptions. As Etsy and Rippling discovered, payment processing can be disrupted when a company’s bank, or the bank used by a dependent supplier or vendor, experiences trouble or collapses. Etsy sellers reportedly suffered delays in receiving customer payments and some Rippling customers’ payroll funds were reportedly frozen.
Payroll is another critical function making SMBs vulnerable to banking failures. Employee Benefits News (EBN) recommends reviewing providers and practices to help prevent surprises from occurring with your company’s payroll, should a key bank or payment processor fail. A March EBN post prompted by SVB’s collapse quotes an insurance technology CEO recommending employers have preparedness plans in place to access additional cash immediately, should a payroll run become jeopardized by a troubled bank.
SMBs should also guard against phishing threats arising from the SVB crisis. The US Cybersecurity & Infrastructure Security Agency (CISA) issued a March 15th alert warning organizations to beware of related scams seeking to exploit the public’s banking concerns. Specifically, the agency advises companies and individuals to be particularly wary of fraudulent bank-related email messages. The agency’s alert warns organizations to treat with caution corresponding attachments, social media posts, requests and even on-premises in-person solicitations relating to any failed or troubled bank or financial institution.
Other warnings for businesses are appearing, too. One report says businesses should be prepared for more rapid bank collapses in the future. Noting AI and algorithm-related advancements will accelerate future activities, SMB journalist Ty West recommends investing “time today to make faster decisions tomorrow.” He advocates formalizing plans to better integrate artificial intelligence technologies within businesses, as a result, to better match the pace at which future changes will likely occur.
Still another recommendation is for SMBs to review the finances of the banks with which they work. It’s widely reported SVB got into trouble due to investing heavily in US bonds when interest rates were unusually low and then rose, lowering the bonds’ value, and the fact the bank targeted the volatile technology sector and startups with its capital. This fact is especially salient considering some industry observers believe there were previously reasons to worry about SVB. One short seller noted as much beginning back in January.
Effectively deciphering financial reports, particularly those of banking concerns, isn’t necessarily every SMB’s area of expertise, however. CNN, for one, notes tracking an individual bank’s performance can prove difficult. But SMBs should endeavor to track the health of the various financial institutions with which they interact. The news site quotes a former JP Morgan Chase executive who states customers “need to be keeping track of their bank’s financial statements, regulatory filings, audit statements and other such materials to be able to identify red flags.”
SMBs don’t necessarily need to overthink the responsibility. Online publisher Business Insider, for example, provides a few tips. In addition to recommending diversifying deposits among multiple banks, the business site encourages simply paying attention to what reputable sources are saying about the banks your firm uses.
Other Sources SMBs Can Tap For Guidance
To further assist, the FDIC publishes guidance businesses and consumers can employ to monitor their financial institutions’ stability. From information on deposit insurance to fact sheets to an online tool for estimating electronic deposit insurance needs, the federal site maintains information and resources SMBs can use to promote healthy banking practices.
The US Small Business Administration also maintains financial education materials. The administration’s free Participant Guide provides numerous recommendations. The guide, which helps educate SMB owners to business banking fundamentals, provides descriptions and explanations for a range of important banking functions. The download also reviews the ins-and-outs of merchant processing services, presents bank selection and fraud-prevention tips and defines various commercial lending options and can serve as a timely refresher for business owners typically focused instead on managing the demands of their own business.
The Consumer Financial Protection Bureau is yet another resource SMBs can trust for banking and financial guidance. The US government agency’s purpose is to ensure financial organizations treat businesses and consumers fairly. Whether seeking information on creating and maintaining a minority-owned firm, women’s business ownership or veterans’ opportunities, the bureau hosts numerous resources and links to corresponding agencies and associations, including the Federal Reserve, which also maintains SMB-centric tools and information.