6 Lessons Business Owners Can Learn from Recent Bank Failures

First Republic Bank made headlines on May 1, 2023, when California regulators stepped in to take over the bank after a private rescue fell through. Regulators struck a deal for JP Morgan to take on First Republic’s $92 billion in deposits. The FDIC will share losses with JP Morgan on its loans, averting a massive collapse.

The bank’s financial crisis stemmed from nearly $102 billion dollars in deposits withdrawn. First Republic’s deposit drain in the first quarter forced it to borrow heavily from Federal Reserve facilities to maintain operations, which pressured the company’s margins because its cost of funding is far higher now.

News of First Republic Bank’s dire issues comes just six weeks after the collapse of the Silicon Valley Bank (SVB) occurred. The bank’s collapse has had a significant impact on businesses worldwide. Indeed, as reported on Global Edge, the bank was among the top 20 American commercial banks, with $209 billion in total assets at the end of last year.

As one of the largest and most successful banks both nationally and worldwide, SVB has always played a vital role in lending a hand to company growth and financial services to many of the most innovative and high-growth companies in the technology and life sciences sector.?

Understanding the Details

We’ve seen the quick rise of the tech industry and sadly, the great fall. Layoffs and downsizing among huge tech companies have spread across the news months before the SVB collapse and now, looking back, were foreshadowing a meltdown.

This is because the collapse of the tech boom from November 2021 onwards meant that many of SVB’s corporate clients were drawing down their deposits in 2022. The high proportion of assets tied up in loans and HTM securities meant that SVB had not left itself a lot of room for maneuvering, should deposit outflows increase. This, coupled with the alarming rise in inflation, meant that after exhausting its cash reserves and short-term liquid securities, the bank had to start selling its Held-to-maturity (HTM) securities: never a good sign.?

These details help provide the background to two major financial institutions’ demise, but times like these can make CEOs and business owners think about their own business financial health and cash. How can we ensure financial security to avoid the same fate?

Applying the Details: Six Lessons You Can Apply Within Your Business

When certain failures happen in an industry, it’s important to take stock of what happened and avoid repeating history. If you are a business owner looking to protect your business from a banking crisis, follow these best practices:?

Diversify Financial Institutions

Diversify the banks that your business works with. Those who had all their money sitting with SVB and perhaps First Republic are currently facing some difficult circumstances including securing their funds, having to establish new lines of credit and new accounts with different banks. By ensuring that your business works with different banks, you can reduce the risk of losing substantial capital due to one bank’s collapse.

Implement Monthly Financial Check-Ups

Another crucial step in ensuring sound financial health for your business is partnering with a trusted business advisor and financial expert who routinely monitors your transactions, accounts, and capital. By having 100% transparency with a trusted financial professional like a B2B CFO?, for example, you can not only be appraised of the gaps your business should be addressing but also you can identify and create specific financial metrics to continually monitor and gauge the company’s financial health.?

Ensure FDIC Backing

It’s always prudent to have that extra stamp of security, and banks that are insured by the Federal Deposit Insurance Corporation (FDIC) offer invaluable peace-of-mind. Having the FDIC stamp means that if that bank fails, the government will back the accounts the bank has and insure the money within those accounts up to $250,000. If following rule No.1, your business can have accounts across a variety of banks and try to keep the money in those banks below the threshold to insure all would be repaid in the event of the bank closing.?

Develop Banking Relationships

One often overlooked best practice is ensuring a close relationship between your business and your bank. To do this, have a designated representative from your company if not yourself communicate with the bank account manager about any financial news or updates your business is going through. A banker who understands your financial history can be helpful when planning your business’ future. You will be in a better position to jump on opportunities if you know your borrowing capacity and interest rates ahead of time. Owners with strong banking relationships are often offered better interest rates, loan structures and terms. You never know when you might need a new line of credit or an infusion of cash. Banking relationships can make all the difference.?

Explore a Range of Borrowing Options

When working with your trusted business advisor, be sure to consider the other options you have for capital and investments. Beyond keeping money in accounts at the bank, explore other options like money market funds, short-term bonds, treasury bills, or other low-risk investments. Diversifying your investment portfolio is also a safe way to funnel money in various streams so that if one were to fail, you have others as your safety net. Also, consider ways to hold less debt, even when you are growing the business.

Consider Beneficiaries

Just as the FDIC insures up to $250,000 in one bank account, they also cover up to $250,000 in deposits to each beneficiary on the account. This means that an account with, for example, three beneficiaries, can be insured up to $750,000. If you do choose to go down this road, work with a business advisor to determine who you will be adding and whether you will need contracts, clauses, and conversations ahead of time to avoid complicated division of the assets.

Preparing for the Tide

Although we can never predict the collapse of renowned banks, CEOs and business owners can take the proper steps and precautions to protect their capital. Building the right relationships with your banker, setting up an emergency fund, diversifying portfolios and banks as well as consistently monitoring your financial health are all prudent ways business owners can protect their finances in the face of today’s economic headwinds.?

Learn more about how B2B CFO? Partners can assist you in building long-term business value and the right banking relationships. Visit b2bcfo.com/Marc-Shirley