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How Small Businesses Can Find Safety Before the Next Bank Crisis

The collapse of two regional lenders, Silicon Valley Bank and Signature Bank, last month caused a ripple of panic among small businesses across the country as owners watched the news unfold and wondered whether their assets were safe — even if their deposits were not in one of the failed institutions.

Now that the panic has begun to subside, advisers are recommending that small businesses examine their accounts to determine their level of risk and protect their deposits from a future bank failure.

When Melissa Wirt started Latched Mama, an e-commerce company that sells apparel for nursing mothers, she did it with a loan from her personal savings — as most small-business owners do. She chose to set up a business account at Atlantic Union Bank because her personal accounts were there, which made it easy to transfer funds if her business needed a cash infusion.

Plus, she liked her personal relationship with Atlantic Union Bank. “They watched my business grow and my family grow,” Ms. Wirt said. “We went through the collective trauma of Covid together, and I learned that banks can care about their customers.”

Melissa Wirt runs Latche Mama, an e-commerce company that sells apparel and accessories for nursing mothers.Credit…Matt Eich for The New York Times

She rarely carries more than $250,000 in the bank, but during the recent banking turmoil, she worried that if Atlantic Union also failed, she might not be able to make her $60,000 biweekly payroll for her nearly 40 employees. So she opened a second business account at a larger bank.

How many small businesses are at risk?

Experts say most small businesses face little risk in a bank failure. The Federal Deposit Insurance Corporation insures deposits of up to $250,000, and most small businesses probably keep far less money than that in the bank. The JPMorgan Chase Institute surveyed 600,000 of its small-business account holders and found that they held a median cash balance of just $12,100.

Two things can change that risk assessment: having employees or being funded by venture capital.

Payroll costs are one of the biggest expenses for most companies. Gusto, a payroll and benefits provider for more than 300,000 small businesses, said nearly half its clients with 50 to 99 employees had monthly payrolls above $250,000. That figure jumps to 95 percent for firms with more than 250 employees.

But only 20 percent of the country’s roughly 33 million small businesses have employees, according to the Small Business Administration, which means few have significant payroll costs that can push their deposits above $250,000.

And just 5 percent of companies are sitting on war chests from investors. “Silicon Valley Bank wasn’t banking small businesses on Main Street, U.S.A.,” said Aaron Klein, senior fellow in economic studies at the Brookings Institution. “They were banking tech start-ups primarily with venture capital backing.”

As a small-business owner, should I worry about my bank failing?

Bank failures have been rare since the last financial crisis, when nearly 500 banks collapsed from 2008 to 2013. But they can happen at any time. A recent research paper suggests that nearly 200 banks are at risk based on the same conditions that brought down Silicon Valley Bank: exposure from rising interest rates, plus high levels of uninsured deposits.

“I think this is a really interesting time for folks to ask: ‘What type of bank am I banking with?’” said Rebecca Romero Rainey, president and chief executive of Independent Community Bankers of America, a trade group. “The risk profile is going to be very different for a bank that is specialized in a unique or higher-risk industry.”

I have less than $250,000 in my account. What should I do?

As long as your deposits are insured by the F.D.I.C., your risk is limited to inconvenience and delays. Regulators usually take over failing banks on Friday afternoons so the Treasury Department can spend the weekend sorting everything out. By Monday, depositors usually have access to their funds.

Small-business owners should instead focus on their day-to-day operations. “Go back to worrying about your business,” Mr. Klein said. “When a bank fails, the government is there lickety-split.”

As an insurance policy, Ms. Wirt decided to open a second business account at a larger bank.Credit…Matt Eich for The New York Times

I have more than $250,000. Should I open multiple accounts?

You can have as many accounts at one bank as you want, but any balance in excess of $250,000 across all of your deposits will not be insured. The F.D.I.C. limits are per depositor, per institution — not per account.

However, there is some nuance.

Business accounts are insured separately from personal accounts. That means one depositor can be insured both as an individual and as a business. In Ms. Wirth’s case, for example, she would be covered for up to $250,000 for her Latched Mama accounts and up to $250,000 for her personal accounts.

Additionally, if you have a joint checking account with a spouse, each person is insured, for a total of $500,000. For example, if you keep $300,000 in the joint account plus $100,000 each in a savings account, your entire $500,000 will be insured.

However, having multiple signers on a business account does not increase the insurance coverage. The best thing to do is talk to your banker, Ms. Rainey said.

Should I open accounts at other banks?

Diversifying your holdings is always a good idea. The F.D.I.C. insures each depositor at each institution, so spreading your wealth offers more coverage. Having a second banking relationship also makes it easier to quickly wire funds to safety if you worry that your bank may be unstable.

“Always have a backup strategy; hope is not a strategy,” said Jeni Mayorskaya, founder of Stork Club, which creates reproductive-health benefits packages that companies can offer their employees.

She has raised more than $30 million from investors and was encouraged to keep her funds at Silicon Valley Bank. But when she started hearing whispers that the bank might fail, she opened accounts elsewhere.

“I grew up in Russia in the 1990s, and what we observed was a financial collapse every five years,” she said. “We learned you always have a diversification strategy.”

Ms. Wirth with her children in Virginia. She would be covered for up to $250,000 for her business accounts and up to $250,000 for her personal accounts.Credit…Matt Eich for The New York Times

What other options are available?

Banks can mitigate risk through the IntraFi Network, a system that can split a customer’s large deposit into chunks that are less than the $250,000 cap. It then sends those chunks to other banks in the system, essentially giving customers multiple F.D.I.C.-insured accounts without having to open — and track — each account.

Customers have two options for how it happens.

In the first situation, banks chop a customer’s money up into certificates of deposit of less than $250,000 and place those accounts in other institutions. The C.D.s earn interest, but the downside is that the money cannot be withdrawn without a penalty before the C.D.s mature.

The second option is a sweep account, in which a customer’s balance in excess of $250,000 is “swept out” every night to other IntraFi Network banks in smaller blocks.

With either choice, these deposits are protected by the F.D.I.C. because they are technically sitting elsewhere.

“This has been more relevant these past few weeks,” said Matthew Burke, chief executive of Cape Cod 5, a 168-year-old community bank in Massachusetts. “Customers can still log in and see their accounts, but we essentially achieve 100 percent F.D.I.C. insurance.”

The service is free but relevant only to businesses with uninsured deposits. For Cape Cod 5, that means fewer than 1,000 of its more than 100,000 customers. Mr. Burke has been reaching out to those customers to set up sweep accounts. Some have declined, saying they are comfortable with the bank’s track record.

But others, like the accounting firm Glivinski & Associates, are using the service. Because Glivinski handles financial matters for its clients, it needs to have access to cash, and the sweep accounts allow it to have operating capital and keep it insured.

Glivinski has also been sending its clients to Mr. Burke to set up sweep accounts. “Almost 80 percent of our clients are nonprofits,” said Valerie Silva, Glivinski’s chief operating officer. “Even they have more than the F.D.I.C. limits in the bank because their budgets are in the millions.”

Should I worry about my service providers?

The collapse of Silicon Valley Bank caused unexpected fallout for small businesses because several payroll processing firms banked there and their funds were temporarily held while federal regulators sorted through the mess. In the meantime, those firms could not cut paychecks for their clients’ employees.

One of the lessons Ms. Wirt, the owner of Latched Mama, learned was: Ask where your service providers bank. She was pleased to learn that Gusto, her payroll firm, had backups in place. If it got caught in a bank collapse, Gusto said, it could easily handle Ms. Wirt’s payroll from another account.

“We say it’s good to have a redundant payroll process system,” said Mike Taylor, Gusto’s chief financial officer.

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