How Will Recent Instability in the Banking Sector Impact Main Street Businesses?
Recent headlines from the business sector about the current crisis affecting midsize and regional banks are top of mind from Wall Street to Main Street. March came in like a lion with the collapse of three mid-size banks—Silvergate, Silicon Valley Bank, and Signature Bank. Despite the Federal Reserve and the private sector’s efforts to save smaller banks and rivals like First Republic and Credit Suisse, the banking turmoil has investors and depositors feeling uneasy. The Federal Reserve’s efforts to tame creeping inflation have had far-reaching impacts on everything from mortgage rates and purchasing power to the loan rates issued at banks. In some cases, these rising interest rates have posed a unique risk to some of the investments made by banks – namely government bonds whose value plummeted as interest rates increased. Determining the impact on this current crisis is multi-faceted, but no doubt will have a trickle-down effect on small Main Street businesses.
Banking Woes May Raise the Risk for a Recession in 2023
After the initial news of the banks’ collapse, everything from making payroll to wondering if banks will pull back on lending have become immediate concerns for business owners. Economists have been debating when and if the U.S. economy will dip into a recession this year and in a recent BizBuySell survey, 75% of business owners shared that the U.S. is currently in or will enter a recession in 2023. Between supply chain issues, inflation, labor market, geopolitical issues, and the current banking scenario, many more economists and business leaders believe it may be difficult to avoid a recession.
Janet Yellen shared with the Senate Finance Committee on March 16, 2023, “A more general problem that concerns us is the possibility that if banks are under stress, they might be reluctant to lend where they’re worried about shoring up liquidity and capital, and we could see credit become more expensive and less available.” Small to medium-sized businesses that use debt to finance their day-to-day operations may encounter funding problems if banking institutions tighten lending standards or issue fewer loans. Credit restrictions are especially challenging for small businesses, as it can become more difficult to carry out daily operations and hire new employees.
Retail Companies Manage Challenging Economic Conditions
When Silicon Valley Bank collapsed on March 10th, many e-commerce retail sites were directly impacted. Camp, Etsy, Shopify, Stitch Fix, and others saw everything from delayed payments, lines of credit become unavailable and payroll disruptions. Despite challenging economic conditions, the retail industry remains resilient. Retailers are building businesses that are nimble by homing in on streamlined operations. Organized financials, detailed operating procedures, and comprehensive vendor policies are keys to maintaining and boosting the value of a retail business, particularly in the current economic climate.
How Small Businesses Can Minimize Banking Risks
As Main Street businesses grapple with the current banking situation, there are a few standard practices they can implement to manage risk. For businesses making deposits of $500,000 or less, it may be beneficial to split accounts between two banks to meet the $250,000 FDIC and NCUA threshold. For business owners who prefer the ease of banking at one bank and need more diversification, look for accounts that are protected by the IntraFi Network. One-third of U.S. banks are part of this network and through their ICS and CDARS services, deposits over $250,000 are distributed across various financial institutions. Businesses can still withdraw funds from their primary bank for easy banking. One potential drawback to this extra insurance is that the investment returns tend to be smaller, but it may be something to consider if insurance is a top business need.
As the public and private sectors step in to avert a full-blown crisis, businesses on Main Street will be watching closely. Small businesses are vital to the economy and have unique banking and credit needs. For businesses with outstanding loans that may be nearing the end of their terms, this may be the time to figure out how to refinance or roll over the loan. Shoring up balance sheets will not only help in the short term, but is critical to maintaining and increasing value in a business.