For small businesses that have kept their money in Silicon Valley Bank – which collapsed last week – the good news is that they will be made whole. The same applies to customers of Signature Bank, which was shut down by regulators on Sunday.
Still, they now have to find another place to store their money — and they and other small firms may fear a similar calamity elsewhere.
“They’re probably thinking that they need to use a bank where they want to have confidence that their deposits are safe, that they won’t go through this again,” said certified financial planner Douglas Boneparth, president of Bone Fide Wealth in New York .
“I know there are plenty of regional and smaller banks that are in fine financial health and would love to be the recipient of new relationships with small businesses,” said Boneparth, who serves on CNBC’s Financial Advisor Council. “But many people’s knee-jerk reaction will be to go to one of the big names in banking.”
A ‘bank run’ at SVB was the catalyst
SVB’s collapse came after it told investors on Wednesday it needed to raise $2.25 billion to shore up its finances. The news sent the bank’s share price plunging, and panic-induced rallies quickly followed – a so-called bank run. Regulators closed the bank on Friday and seized its deposits.
While accounts in banks are generally covered for up to $250,000 per deposit per ownership category of the Federal Deposit Insurance Corporation, was a major concern at SVB the money over this amount. The bank generally catered to venture capitalists and startups in the local area and elsewhere in the United States, and as of December, about 95% of deposits at the bank were uninsured.
But on Sunday, regulators approved a plan to ensure that customers of SVB – which just a week ago was the country’s 16th largest bank – will get all their deposits back. The plan also applies to Signature Bank, whose customers also withdrew money en masse.
For small business bank customers, the plan should provide some reassurance.
First, the message is that when a bank goes bankrupt, customers’ deposits will be covered for an unlimited amount, Boneparth said.
“How temporary or permanent it is, we’ll find out,” he said. “But right now it’s welcome news.”
FDIC coverage may be enough for some businesses
Additionally, the FDIC coverage at their bank should be sufficient for some small businesses.
“If you’re a small business with never more than $250,000 in deposits and your bank goes bust, it’s not going to be a problem, other than a big hassle,” Boneparth said.
Consider several banks, check financial stability
You may also consider having accounts at different banks, depending on the complexity of your business, said CFP Marguerita Cheng, CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.
“You can have a primary or main relationship with payroll,” said Cheng, who is also on CNBC’s Financial Advisor Council. “You can also have a relationship with [enterprise or corporate] financial management, cash reserves or a merchant account.” Merchant accounts accept payments from customers via debit or credit cards.
It’s also important to check the financial stability of banks you do business with, said CFP Cathy Curtis, founder of Curtis Financial Planning in Oakland, Calif., and also a member of the council.
“Look up the bank’s accounts, appraisals and reviews,” Curtis said.
She also recommends looking for banks that offer specialized services for small businesses — for example, a dedicated business banking team, merchant services, or business loans or lines of credit.
Additionally, be sure to ask about fees, interest, monthly fees, or balance requirements. It’s also important to understand their online and mobile interface, Curtis said. “Is it sophisticated or clumsy?” she said.
In addition, you can ask other business owners who they bank with.
“Find out if they’re satisfied with customer service and business service,” Curtis said.