In this Small Business Update event held on March 17, 2023, we examine recent bank failures and their potential impact on small businesses.
On March 10, 2023, the Federal Deposit Insurance Corporation (FDIC) announced that it was taking over operations at Silicon Valley Bank (SVB), the 16th-largest bank in the country. Two days later, Signature Bank was shut down by New York state regulators.
Both bank failures — the second- and third-largest incidents in U.S. history, respectively — happened because numerous depositors simultaneously withdrew their funds in the wake of major investment losses and fears that the banks would soon become insolvent. Account holders at SVB and Signature Bank were temporarily unable to access or withdraw funds until the government unfroze them on Monday, March 13. This meant no new purchases could be made and any pending transactions were stuck in limbo.
Many small businesses that didn’t directly bank with SVB or Signature learned about the collapses through communications from third-party partners whose payment services were stalled because they banked with one of the failed institutions. Etsy sellers received a notice that their payments would be delayed. Customers of payroll providers that distributed employee paychecks from an SVB account were advised to attempt to have their own banks reverse pending payroll debits and wire the funds directly to the provider to ensure timely direct deposits. Businesses whose clients paid using funds held at one of these banks were informed that invoices could not be paid until they transitioned to a new financial institution.
Key takeaways from our experts:
Tom Quaadman, Executive Vice President of Center for Capital Markets Competitiveness, U.S. Chamber of Commerce
Don’t panic — it’s not 2008
“First off, everybody should take a very deep breath. This is not 2008. This is a very different situation, and it’s very localized. It's not a similar situation as to what we faced in 2008, or even frankly, what we [saw] three years ago, in March of 2020, when the economy started to shut down as a result of Covid. What happened [in] 2008 … [was] a systemic problem. We're talking about three banks here that are part of a very unique ecosystem. We're not seeing the stock market take deep plunges of 1,000 points … on any day this week.”
Keep an eye on the evolving situation
“We have seen that there's … more of a restriction of credit and that is actually a natural reaction to interest rate hikes. We also had inflation numbers this week that were still at 6%, so still higher than normal and about three times where the Fed normally would like to see inflation. With these higher interest rates, we are going to see more of a credit crunch. I know for many businesses it's a little unusual, because to some degree, we've had about 15 years of extremely low or even … 0.0% interest. So, it's trying to really adapt to the ‘new world order’ that, quite frankly, is actually … what the norm has been for most of our history.”
Curtis Dubay, Chief Economist, U.S. Chamber of Commerce
Be prepared for a credit crunch
“The mechanism that will accelerate us into a recession or push us over to it, and lead us to a slowdown is the lack of credit. What's going to happen is, the creation of credit is really going to slow down while we go through this painful process of everyone looking at all the different financial institutions and figuring out who's in a good position and who might not be. What that means is that there'll be less credit out there. So, if you have an available line credit that you tap to fund operations, that might be curtailed. If you need to get a loan to buy an important new piece of equipment, it might be harder to find, [or] it might be delayed longer than usual. And those things — the uncertainty that arises from that and the actual reduction in credit — will likely push the growth lower and could finally tip us into that long-awaited recession.”
Tom Sullivan, Vice President of Small Business Policy, U.S. Chamber of Commerce
Focus on banking relationships
“When small businesses … were desperate for PPP loans, they learned the value of having a relationship with their banker, [and to] dig into that value, dig into that relationship … for investment advice. Not just, ‘Is my money safe?’, but, ‘What should I be doing with surplus cash? What types of restructuring should I be doing to make sure that I'm in fixed-rate credit instead of variable rates, which are susceptible to rising interest rates?’ That type of conversation depends on the relationship you have with your banker … [so] really focus on that relationship.
Look at your metrics and profitability
“Really focus on metrics. Look at your budget, look at your projections, and then compare that to actuals. As times become tougher, that examination of those metrics becomes more intense, and out of that regular examination of those metrics comes solutions to get past a credit crunch.
Also … focus on the profitability of every product. When you're looking [at] not just profitability overall, but [for] each product … you're much more likely to focus on those profitable activities and perhaps pivot away from the non-profitable activities.”
Build up cash reserves
“The MetLife and U.S. Chamber of Commerce Small Business Index [that came out] right before the pandemic … showed that about a quarter of businesses have less than one month of payroll on hand if something bad happened. And so then … through the pandemic … small business owners faced the type of crises that we all faced as Americans. They became more resilient. And now there's this feeling like, ‘Hey, if I can get through Covid, I can get through anything.’ PNC just put out a report that showed that the percentage of cash reserves by small businesses has actually gone up. And that's very good news. So we have learned some really tough lessons throughout the pandemic. Turns out that a lot of those lessons are becoming very valuable to get through the ripples that we're experiencing right now.”
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.