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Navigating the New Banking Landscape as a Small Business

Adapting your small business after the 2023 banking collapse? Explore practical tips and more for banking success, including how to choose the right banking partner.
Navigating the New Banking Collapse after the 2023 banking collapse - Guidant Blog.

When business history is revised, it will surely include the 2023 banking collapse as a major event. Three banks — Silicon Valley Bank, First Republic and Signature Bank – collapsed. The fallout from their collapse is likely to spur new banking rules and regulations that affect small businesses, as well as challenges and opportunities.

But how can small businesses adapt to this new environment? In what follows, we’ll recap the banking collapse of 2023 and its potential effects, as well as provide practical tips and advice for small business owners on how to navigate the changing landscape — including how to choose the right banking partner and how to stay compliant with new regulations. 

No matter the economic landscape, every business owner should be ready. Master the art of preparedness in How to Navigate Business Uncertainty.

The Banking Collapse of 2023: A Recap

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How the Banking Collapse Began

In Spring of 2023, three banks (Silicon Valley Bank, First Republic and Signature Bank) collapsed, roiling the stock market and fueling fears that even more banks would topple.

A banking crisis is ominous for several reasons. First, banks are sources of capital for their customers — and as such, are expected to have sufficient deposits on hand to meet demand. If they don’t, it is a signal of distress in the financial system as a whole.

Second, the financial institutions that failed were representatives of a crucial economic sector for small businesses: smaller regional banks. It’s estimated that 70 percent of small business lending is done by small regional and community banks, rather than metropolitan commercial banks, so weakness in that sector can cause weaknesses in small businesses — which are vital in driving the economy. In fact, small businesses generate 44 percent of U.S. economic activity

Third, banking crises can indicate weakness that will spread to other banks and to other sectors of the economy.

Fortunately, the U.S. has largely weathered this banking crisis. Although the sector was troubled during and after, it’s important to remember that no customer of these banks actually lost money. Why? Remember, most bank accounts are insured for up to $250,000 by the Federal Deposit Insurance Corporation (FDIC). In this case, in addition to the FDIC insurance, the U.S. government stepped in to make all of the failing banks’ customers whole on their deposits. Each bank was ultimately absorbed by a competitor.

Understanding the Root Causes of the Banking Collapse

It’s more important, actually, to focus on the underlying reasons for the banking crisis. The financial services industry has been pressured by a number of economic factors. First, interest rates have risen rapidly since early 2022. Climbing interest rates can decrease loan activity, as potential loan customers may wait until rates are lower — and loans are, after all, one of the chief products in any bank’s business model.

Second, many financial services firms experienced scant loan-making activity during the COVID pandemic, which may have pressured their margins. Some bought Treasury bonds during this period, whose yield may have been less than interest on loans would have been.

Third, COVID and the accompanying work-from-home trend has pressured the commercial real estate (CRE) sector, which is worrisome for financial services firms involved in CRE loans.

Fourth, the economy has faced a number of headwinds, including rising interest rates and galloping inflation. Many economic forecasters have expected a recession or slow growth.

The 2023 Banking Collapse to Now

Do these still pressures still exist? Some do. Interest rates are still higher than they were a year or two years ago. The CRE sector continues to face difficulty, particularly in some regions. The economic outlook is uncertain: many forecasts continue to expect a recession at some point, and many others think growth will be slow in the U.S. and either drop or be muted in Europe and Asia.

But some pressures have abated. The U.S. Federal Reserve has signaled that its series of interest rate hikes may be over, at least in the short term. Rates hikes are one of the tools to combat inflation — and inflation has cooled somewhat.

It’s also important to realize that each of the financial institutions that failed had individual, specific problems. Silicon Valley Bank experienced a bank run triggered by a loss and credit downgrade. In a bank run, depositors want their money, and the bank simply does not have it. It was also heavily involved in the technology sector, which has been having economic problems. Signature Bank was involved in cryptocurrency, a sector that experienced its own spectacular failures in the implosion of a major crypto exchange, FTX. First Republic was also involved in tech startups.

So if you as a business owner have been wondering whether your own bank is likely to fail: the risk of a contagion of bank failures seem to be over. But both current and aspiring business owners also need to navigate a changing banking industry landscape. Let’s dive into how to choose the right banking partner and how to stay compliant with new regulations.

How To Navigate the Changing Banking Landscape

How to Choose the Right Banking Partner

One of the key moves small business owners need to do is to choose the right banking partner. Choose a bank that has expertise in your industry and sector. Ask other small business customers what bank they use and why. You want a bank where you can talk to the management and discuss your business model and plans and feel that they are knowledgeable about your needs. Your bank can be a source of capital, but also of advice.

You may also want to ask candidly about their exposure to potentially risky segments of the economy, such as tech start-ups (always risky), cryptocurrency and CRE lending. If your business is involved in any of these sectors, it may be especially wise to choose a bank that is not involved in them, so that your business and financial institution aren’t subject to any adverse effects at the same time.

Also, be sure that whatever financial institution you choose is insured either by the FDIC or by the National Credit Union Administration (NCUA), which insures credit union accounts up to the same limit as the FDIC, $250,000. If you do this, both your personal and business accounts are insured in case of a financial institution failure for up to $250,000. This applies to financial institution products such as checking accounts, savings accounts and certificates of deposit. The FDIC and NCUA do not, however, insure other financial products, such as stocks and bonds.

Although the government did make all depositors whole after the 2023 bank failures, that is not enshrined into law, so it is unknown whether that would happen in the event of another bank failure.

In the wake of the banking crisis, one potential suggestion has been to disaggregate business accounts from the $250,000 limit. However, this would take an act of Congress to do, and whether it will happen or not is not currently known.

Looking to finance your business? See the 7 Best Options for Small Business Funding today.

How to Stay Compliant with New Regulations

In the wake of the banking crisis, new rules and regulations for the banking sector are being discussed, to make them safer and stronger.

Any new regulatory compliance rules for the banking industry are likely to have an effect on small business owners. It’s possible, for example, that tighter regulation will make business loans and other products such as lines of credit or letters of credit somewhat harder to get, because underwriting standards will need to be tightened. Ultimately, tightened access to capital and access to credit is designed to make both the financial services sector and the overall economy stronger, and to ward off a series of bank failures. It can, though, be frustrating to be turned down for business loans or other financial products due to new regulation in the banking industry.

The solution as a whole is to make sure your business is sound economically. If you take on a loan or other debt to finance your expansion, make sure you can reasonably pay the monthly debt service. You should aim for cash reserves that can see you through economic downturns, which occur periodically. Finally, continue to run a strong business by listening to your customers, differentiating yourself from your competition and innovating.

If you’re ready to fund your business debt-free, then 401(k) business financing — also known as Rollovers for Business Startups (ROBS) might be for you. Learn more in What is ROBS? How 401(k) Business Financing Works.

How Guidant Helps Small Businesses

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When it comes to finding a trusted small business partner, look no further than Guidant Financial. Our extensive network includes collaborations with hundreds of leading banks and lenders across the U.S.

From guiding you through the intricacies of SBA loan applications to helping you qualify for creative financing solutions like Rollovers for Business Startups (ROBS), Guidant has been instrumental in the success of over 30,000 small businesses — helping them thrive throughout the lifetime of their business journeys. Contact us today to start your business journey.

Call us today at 425-289-3200 for a free, no-pressure business consultation to get started — or pre-qualify in minutes for business financing now!

“If you’re committed to it and you have a vision, then Guidant is the way to make it come to life.”

Marc Warner, Bovine Burgers

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