Small Businesses Weigh Banking Options Amid Turmoil

(AP) Sarah Walker, owner of Nuance Interior Design Showroom in Bellevue, Washington, thought she had her banking arrangements fairly well protected. She kept deposits at Wells Fargo and a brokerage account at Fidelity under the federal insurance cap of $250,000.

But after the recent banking turmoil, she moved about 5% of her total savings into Certificate of Deposits, or CDs, at Barclays. They offer 5% interest rates on deposits, much higher than traditional accounts, if a customers keeps money in the CDs for a year. She also invested more in Treasury bonds.

“Those are two very stable things, we didn’t put a ton of money in them, but it’s more than a rainy day fund, it would cover us for a year,” she said. “I do feel better about having diversification. The unfortunate thing is there is only so much you can do.”

The collapse of Silicon Valley Bank and Signature Bank, and the bailout of First Republic, was a jolt for small businesses of all stripes, spurring many to scrutinize their banking services and mull whether or not they should make changes to ensure their money is safe. The turmoil in the banking sector just added to the uncertainty already caused by stubborn inflation and higher interest rates.

Experts say it’s probably a good idea for small businesses to diversify funds and make sure they’re in close contact with their banker, but emphasized that in the short term their bank accounts are safe because regulators have shown they’re willing to step in when needed. And while big banks may seem like a safer option for their savings, regional and community banks have advantages too.

“It’s certainly a good time to reevaluate your relationship with and diversification of assets amongst banks,” said Ori Epstein, technology tax partner at Aprio in Atlanta. Even if small businesses don’t need to shift their money now, it’s worth setting up a schedule for evaluating their banking services on a regular basis, he said.

Nidah Barber-Raymond, owner of chemical peel company The Peel Connection in Beverly Hills, California, and New York, doesn’t plan on making any immediate changes to her banking at Bank of America, but said the bank collapses were a wake-up call.

“It’s really scary,” she said. “It just opened up my eyes to the possibilities of things going very wrong in this country.

After the collapse she initially considered putting her money in bonds because she thought that might be safer. But she consulted with her financial adviser who told her Bank of America was not at risk.

Still, she worries that pressure on smaller banks might make it harder to get loans in the future.

“It would be a shame not to be able to go to smaller banks should my business need capital in the future,” she said.

Sanjyot Dunung, founder of Atma Global, which offers digital services that help companies communicate across countries and cultures, said the collapse gave her more confidence in her regional bank, TD Bank, since it isn’t focused on startups or fintech. She keeps more than $250,000 in the account but is hoping the FDIC raises its insurance cap. Still, she might move some funds to another bank.

“The SVB (collapse) has made me think we should have an additional bank, perhaps one of the big banks, for broader diversification,” so that all of her money would be insured and because it’s safer to use more than one bank in case one goes under, she said.

About 55% of small businesses use a large bank as a financial services provider and 43% use a small bank, according to The Federal Reserve’s 2022 Small Business Credit Survey. Twenty-four percent use a financial company that isn’t a bank, and 13% use a credit union.

Randell Leach, CEO of Oakland, California-based Beneficial State Bank, said people should consider community banks and Community Development Financial Institutions, not just the big players, because those can align better with some small business’ goals.

For example, his bank specializes in B Corps., for-profit corporations that are required by their shareholders to also produce a public benefit. And CDFIs focus on impoverished communities and can better service some small businesses that bigger banks would classify as “high-risk.”

Community banks are “literally embedded in the community, they’re not out there doing financial engineering,” he said. “They’re literally trying to help keep local depositors’ money safe and invested in their own communities.”

Scott Orn, chief operating office at Kruze Consulting, works with venture capital-backed startups and said about 55% of his clients had accounts at Silicon Valley Bank. They also bank at regional banks like First Republic and fintechs such as Brex.

His frantic clients were relieved when the government stepped in and they were able to access their funds that had been at SVB and make payroll.

“We are encouraging people to diversify and have a portfolio of banks,” he said. He said he understands that is easier to have loans and a dashboard for financial services all at one bank, but “I think everyone is going to diversify, that’s what we’re seeing across our client base is everyone is diversifying.”

A review of finances and shoring up relationships with bankers is key now because the banking turmoil could help tip the U.S. economy in to a recession and a tighter credit market, said Curtis Dubay, chief economist, economic policy division at the U.S. Chamber of Commerce.

Dubay expects credit creation to slow as the market determines which banks are in good financial position and which may not be.

“So if we have an available line of credit that you tap to fund operations, that might be curtailed,” he said. “If you need to get a loan to get by an important new piece of equipment, it might be harder to find, it might be delayed longer than usual.”