Bank failures are very rare. According to FDIC data, less than 1 percent of banks insured under the Federal Deposit Insurance Corp. have failed each year over the past 10 years. This is a small fraction of the banks that fail each year, if any.
Many business owners are now wondering if their bank and capital is safe after the recent, high-profile collapses at Signature Bank and Silicon Valley Bank.
It is likely that the answer to this question is “yes”. However, business owners need to take steps in order minimize their risk and prepare for an eventuality such as a bank failure.
How to safeguard your business from bank failure
The $250,000 cap
FDIC insurance covers up to $250,000 per depositor per institution and per ownership category (single, joint, corporate, etc.). To get an idea of your coverage for personal and business accounts, you can use the FDIC insurance estimator.
Consider joining the IntraFi network if your deposits exceed $250,000 Two key services are offered by banks in this network: ICS or CDARS.
The Certificate of Deposit Account Registry Service and Insured Cash Sweep spread your deposits among multiple financial institutions within IntraFi, allowing you to keep no more than $250,000 principal and interest at any one bank.
You can still withdraw and deposit funds from your primary institution. This makes it easy to manage your money and gives you full FDIC insurance for millions of dollars.
These accounts can be more costly and take longer to set-up than traditional business checking accounts, according to Randell Leach. Beneficial State Bank is part of the IntraFi Network, and serves customers in California and Washington. If a business has $500,000 in deposits, it might be more cost-effective to divide the funds manually. There are also free savings and business checking accounts at several banks.
Leach states that although it is not the right product for everyone, it can be very useful if insurance is your primary concern. It might be more appealing in this environment than it is six months ago .”
Multiple business bank accounts
Don’t place all your eggs in the same basket,” Larry Rush says. Rush has over four decades of experience in commercial lending and business banking and is currently a volunteer mentor for SCORE, which provides free mentoring to small businesses nationwide.
It doesn’t matter if you have $12,000.
Keep a minimum of one month’s operating expenses in an emergency fund. This should be kept separate from your business checking account. This will help you to protect yourself from bank failures and other unexpected expenses.
Rush suggests to his clients to take it one step further. Keep your payroll account at one banking institution, your personal account another and your main bank account at yet another.
What should you do if your bank closes?
Although bank failures are rare, they can happen. A smart plan of action can minimize the negative impact of a bank failure on your business.
Get the facts
Accounts are frozen when a bank goes out of business. The FDIC then takes control and creates a “bridge bank” to restore access. This bank is usually only insured up to the bank’s maximum amount. The federal government guarantees all deposits at Silicon Valley Bank or Signature Bank, but it is not the norm. )
This takes some time and business owners must quickly assess how much money they have tied up and which business functions are being affected, such as payroll or accounts payable.
Next, find out when your funds will be available. The FDIC will communicate with you to explain the timeline, answer frequently asked questions, and provide contact information. This information is available on both the website of the bank that failed and the FDIC website.
If you have a line of credit or loan at the bank that failed, you can continue making payments as normal — the FDIC’s Bridge Bank will take over the account immediately.
Communicate with stakeholders
Customers, clients, and employees should not be left in the dark. Rush advises that you immediately notify vendors and payroll if they are affected by bank closings.
Rush states, “The first thing that I would do is contact my clients with accounts payable with.” You can help them understand the situation. Your business bank has been closed and your assets have been temporarily frozen. You expect to be able to access your accounts within a few days. “If I were the accounts payable, I would understand. Particularly if you have a track record .”
Open a new bank account for your business
After the failure of Silicon Valley Bank, depositors turned to the “too big for fail” banks like Chase, Bank of America, and Citibank. However, these accounts have some downsides. They come with higher fees, tighter transaction limits, and lower interest rates that online or community banks. When choosing a bank to deposit your funds, you should consider all these factors.
Many traditional and digital banks allow you to open a business account online within minutes. Pay attention to any delay or deposit hold times for new customers. ACH transfers may take up to five days to process with certain business accounts. Mobile check deposits can be held up to seven days with some banks. You don’t want to hold on to more money. (Wire transfer is the most efficient way to move money between banks. )
Take a look at the financials of all business banks you are considering and identify red flags such as excessive focus on one sector, high ratios of bad or late debts to assets, or any other indicators that could indicate financial fraud, suggests Gregory Bader, who is the head of the banking & financial services practice at Gunster Law Firm, Florida.
Bader states, “You don’t want to jump from one frying pan to another.” “You want to find a bank that is healthy enough to offer sufficient FDIC coverage span>