This past week, the U.S. banking sector was shaken up by the collapse of Silicon Valley Bank and Signature Bank. Several other smaller and regional banks also tittered on the brink of collapse in the wake of these failures. Many business owners were left with the prospect of losing all of their uninsured money before the US government stepped in to backstop all deposits at the two failed institutions. While the crisis appears to be under control for the moment, businesses have been left wondering what they should do to prepare. While it is relatively rare for a bank to collapse, small businesses can take several steps to mitigate the risks associated with such an event:
Diversification: Spread your financial assets across multiple banks or financial institutions. By not putting all your eggs in one basket, you reduce the impact of a single bank's failure on your business.
Research and choose stable banks: Conduct due diligence on the banks you work with. Select banks with strong financials, good credit ratings, and a track record of stability. Well-established banks are generally more stable than newer or smaller institutions. Businesses may also consider working with banks that are not publicly listed as an additional hedge.
Maintain sufficient insurance coverage: Ensure your business accounts are covered by deposit insurance, such as the FDIC (Federal Deposit Insurance Corporation). Deposit insurance provides protection to depositors in case a bank fails, up to a certain limit. Certain banks will provide additional insurance to cover amounts that exceed the coverage provided by the FDIC.
Monitor your bank's financial health: Keep an eye on the financial health of your bank by reviewing their financial statements, credit ratings, and news about the institution. This vigilance can help you identify potential issues early and take appropriate action.
Maintain good banking relationships: Cultivate strong relationships with your bank and other financial institutions. Good relationships can prove valuable in case of a crisis, as they may help you secure new financial arrangements more easily if needed.
Establish contingency plans: Develop a plan for how your business will handle a potential bank failure. Identify alternative banks or financial institutions you could work with, and consider other funding options.
The attorneys at Outside Legal Counsel LLP are proficient in helping clients negotiate financing agreements and can provide guidance with such needs.
This is not legal advice and is attorney advertising.
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