Building Financial Resilience as a Small Business, Even in Economic Uncertainty

In March 2023, two major financial institutions, Silicon Valley Bank (SVB) and Signature Bank, were shut down and taken over by the Federal Deposit Insurance Corporation (FDIC) due to “bank runs” where depositors panicked and withdrew more money than either bank had on hand. For several days following the shutdowns, account holders could not access funds. Until the FDIC’s announcement that it would unfreeze assets and allow all deposits could be withdrawn, these customers were unsure whether their assets above the federally-insured limit of $250,000 would be protected.

For small businesses, the inability to tap into cash reserves could have had potentially disastrous consequences on their operations had the FDIC not stepped in. During a CO— Small Business Update, three experts from the U.S. Chamber of Commerce shared insights on the circumstances leading up to these bank failures, the larger implications for the U.S. economy, and what small business owners can do to build up financial resilience during these uncertain economic times. 

The Circumstances of SVB and Signature’s Failures Were Different than the 2008 Crash

While it may seem easy to compare the failures of these two banks to the circumstances surrounding the economic turmoil leading up to the 2008 recession, Tom Quaadman, Executive Vice President of the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce, reminded everyone that “it’s not 2008” and that the stock market has not responded in the same way to this incident as it did back then.

“What happened [in] 2008 … [was] a systemic problem,” said Quaadman. “We're talking about banks … that are part of a very unique ecosystem. We're not seeing the stock market take deep plunges of 1,000 points.”

Quaadman also emphasized the fact that the FDIC’s actions and takeover of both banks were done without any sort of special government bailout. 

“This was done within an existing power,” he said. “So it's a much different situation than we were in 15 years ago.”

Businesses Should Prepare for an Upcoming ‘Credit Crunch’ and Recession

While experts at the Chamber don’t see a domino effect of numerous other banks failing like SVB and Signature, there will be an economic repercussion, namely a “credit crunch” where capital may be less accessible and available to potential borrowers.

“There's … more of a restriction of credit, and that is … a natural reaction to interest rate hikes,” Quaadman told CO—. “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 … is actually … what the norm has been for most of our history.”

Curtis Dubay, the U.S. Chamber’s Chief Economist, added that the lack of available credit will likely be a factor in an impending recession. 

“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,” Dubay explained. “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.”

“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,” he added.

Strong Banking Relationships and Metric Tracking Will Help Small Businesses Stay Afloat

Tom Sullivan, Vice President of Small Business Policy at the U.S. Chamber, offered some key pieces of advice for small businesses as they navigate this period of uncertainty. First, he advised building a strong relationship with your banking provider.

“Dig into that relationship … for investment advice,” Sullivan said. “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?’”

He also recommended carefully tracking financial metrics and building up cash reserves in case you are unable to access credit.

“Look at your budget, look at your projections, and then compare that to actuals,” explained Sullivan. “Out of that regular examination of those metrics comes solutions to get past a credit crunch.”