How to keep your business deposit cash safe during a banking crisis

You might think that small businesses, which are more likely than the average depositor to have accounts above the federal deposit insurance limit of $250,000, might be uneasy about the U.S. banking system. And you would be right.

The past two months have been rough on the U.S. banking system: Three fast-growing regional banks failed in succession when depositors lost confidence in the banks’ stability and yanked their money, culminating in the over $100 billion pulled from First Republic Bank and eventual sale to JPMorgan. JPMorgan CEO Jamie Dimon declared “this part of the crisis is over” after his bank’s deal, but the volatility in regional banking stocks continued on Thursday, with shares of PacWest plunging.

But small business owners have other worries on their minds when it comes to financial relationships and risks. For one, higher interest rates and more difficulty getting access to capital including loans to grow. And at a time of higher prices on many core business inputs, a rush to switch financial institutions as part of risk management, even with the best of intentions, could lead them to overpay in bank account fees and sacrifice valuable, high-touch relationships.

Right now, small business owners are split about evenly between those who express confidence in America’s banking system and those who do not (49% vs. 50%), according to the Q2 CNBC|SurveyMonkey Small Business Survey released on Thursday morning. A majority (62%) say they are confident their business capital is secure. But fewer (53%) say it is easy for them to access the capital needed for their business to operate. With lending expected to tighten further in the wake of the three banks’ failures, and another interest rate hike by the Federal Reserve on Wednesday pushing business loans firmly into double-digit percentage territory for many borrowers, the worries will persist.

Kirsten Quigley, the CEO of Lunchskins, a Bethesda, Md.-based small business that sells environmentally friendly sandwich bags, said the interest rates on the loans Lunchskins uses for working capital have more than doubled in the past year. “When you’re funding your growth with that kind of debt. It really takes a toll on your cash flow,” said Quigley.

The regional bank she uses, Eagle Bank, isn’t anywhere near the “too big to fail” category.

But she values the personal attention she gets for her firm, which was founded in 2008 and is now in more than 13,000 grocery stores nationwide, including Walmart, Target and Kroger. In March, the CEO of the Bethesda-based Eagle Bank, which has 14 locations, sent a note to its customers assuring them that it has ample reserves. “It’s a physical office and physical person,” Quigley said. “When I call, they call back.”

Small businesses can feel like they’re up against a wall. They don’t have the leverage of a big business to negotiate a special deal on interest rates and fees, or the luxury of time to keep moving their financial services around.

But there are steps small businesses can take to manage their financial services relationships that balance risks, costs and time.

Always keep up on interest rate offers.

Quigley keeps tabs on the interest rates, so she knows that while rates are high, what she gets from her local bank is competitive.

According to the CNBC survey, small business owners are almost evenly split across banking institutions by size. About 40% of small business owners say they do their business banking with a large bank. Almost equal percentages work with regional banks (31%) and community banks (32%).

Safety of deposits is a concern, but not a huge one.

Safety is a concern, and the PacWest headlines are sending more jitters through the market, but overall, national banking system data shows that the deposit safety issue is a shrinking one. In the wake of the three bank failures, some depositors pulled money from smaller and regional banks and put them into larger banks. But the outflows stabilized by the end of April, down only about 1% at the 850 smallest banks, according to the Federal Reserve Board of Governors deposits data.

The CNBC survey finds that the majority of business owners (71%) do not plan to open new accounts in the next year, while 43% say they’re moving money from one account to another about as frequently as they were a year ago.

Bank size does matter to business owners.

That doesn’t mean there’s no distinction being made by owners based on bank size. When asked if it is easy to access necessary capital right now, the percentages go down by large bank client (59%) to regional bank client (56%) to community bank client (50%), according to the survey. And there is a similar small it noticeable trend line on confidence that their business capital is secure: 67% among large bank clients; 66% among regional bank clients; and 60% among community bank clients.

“There is a run to larger banks,” said Eleni Delimpaltadaki Janis, CEO of Equivico, an impact investment firm that provides capital to responsible lenders to increase fair lending to underserved small businesses.

Big banks aren’t necessarily the best choice.

Delimpaltadaki Janis doesn’t think the biggest banks are the best choice for the majority of small businesses. “That’s not who they’re interested in banking,” she said.

In fact, the CNBC survey that among the minority of business owners who do plan to open a new account in the next year, they are almost evenly split between planning to do so with a large (30%), and regional or community bank (28%).

“On the other side, you must protect your money,” Delimpaltadaki Janis said.

She advises small businesses worried about safety to look for a bank that offers an insured cash sweep account. If your balance exceeds the $250,000 federal insurance cap, money will be automatically moved into other institutions, multiplying your cap by two to five times.

It’s worth noting that, in the wake of the three bank failures, the Federal Deposit Insurance Corp. recommended that the federal government expand its insurance program for business accounts.

There’s not much a small business can do about the rising interest rate environment. But you can look for banks that are more likely to approve your loan or an expansion in the first place, or work with you to find the right credit line. Small business owners say emotional support and the time savings of being able to reach people is a under-valued commodity.

“I bank with CommunityAmerica Credit Union,” said Isaac Collins, who owns three Yogurtini franchises in Kansas City, Missouri, by email. “It’s a local credit union here in KC and I LOVE my experience with them. … I have an entire team that I can reach out to serve me in whatever area I want without even going into a local branch. That buys a lot of my time back since I’m so busy!”

Review a bank’s loan approval rates.

If you sever your ties with a smaller bank in the interests of safely, you might make it less likely that you’re approved for a loan. Even though more small businesses apply at a large bank for a loan at a higher rate than any other, small banks and alternative lenders, including online lenders, approve loans at higher rate than large banks, according to the Federal Reserve’s Small Business Credit Survey 2023. Some 82% of loans were approved at small banks, versus 68% at the 25 largest banks. Online lenders and finance companies were in between, at 76% and 71%, respectively.

Be wary of credit card offers as loan replacement.

In a higher interest-rate environment, banks are more likely to try to sell credit card financing to small businesses. There are valuable offers to be had; some bank credit cards offer travel and cash rewards. But in the current rate environment which has seen the Fed raise its benchmark rates from 0% to 5% in a year, credit card debt can come at interest rates topping 25% annually. “Credit cards can be expensive – in a rising interest rate environment they will be especially so,” said Andy Schmidt, vice president and global industry banking lead for CGI, a Montreal-based IT and business consulting firm. “One does need to be careful.”

Seek interest on cash accounts.

Everyone is chasing higher interest rates on accounts right now. That’s not a business owner phenomenon specifically, with individual savers fleeing low-yielding big bank deposit accounts for money market funds and other higher-yielding offers in the 4% to 5% range as long as they can lock up money for longer without a liquidity issue. According to one recent estimate offered on CNBC, as much as $1 trillion could move out of bank deposit accounts yet, not for safety concerns, but as investors and savers seek higher yields.

For business owners who might not have the leverage to lower the interest rate on debt or a working credit line, the flexibility of financial offerings today and the ease of moving money between financial institutions — which the Silicon Valley Bank run proved — is a reason to seek a higher interest rate on the cash you maintain in accounts. As a small business, you might have tens or hundreds of thousands of dollars on average in your accounts; that money can be earning interest of as much as 4%, Schmidt said.