How much should business owners worry about recent bank failures?

By John Minnis  –  CEO and Managing Partner

Since March 10, two large banks have collapsed; first Silicon Valley Bank (16th largest bank in the U.S. based on assets, and second-largest bank failure in U.S. history) followed by New York-based Signature Bank, the third largest bank failure to date.

Regional banks including First Republic Bank, PacWest and Western Alliance have caused account owners bounds of anxiety about their resilience. CNN Business reported that other banks recently sought emergency loans from the Federal Reserve. According to the article, “Banks borrowed a record $153 billion from the Fed’s discount window last week — a last-resort option for banks to gain quick access to cash.”

What do these recent failures and emergency loans mean?

There isn’t a need to outright panic. These loans mentioned above from the Federal Reserve do not intrinsically lead to a failure of the global banking system. None of these loans were emergency or overnight loans borrowed on secondary credit.

According to the previously referenced CNN Business article, the loans delivered by the Fed were primary credit, which “indicates that U.S. bank supervisors consider the banks that needed emergency support ‘healthy’ and not at elevated risk of imminent failure,” noted Jill Cetina, Moody’s analyst.

The not-so-good news: Banks are still healthy even with the strain on the global financial system. However, this strain may cause harsher and more thorough credit checks, less money flowing to businesses and banks to be more resistant to lending money, reigniting the fear of a recession looming.

Another term circulating in the news right now is ‘credit crunch’ – a significant tightening of lending standards among banks, making loans hard to come by and even more expensive. New businesses or businesses that don’t have a robust balance sheet will have a harder time being approved for loans — limiting expansion opportunities, hiring new employees or opening new stores.

What should SMBs make of the current state of banking?

The banking crisis triggered by the failures of Silicon Valley Bank and Signature Bank will likely lead small and mid-size businesses (SMBs) to prioritize having a healthy balance sheet as well as seeking alternative funding solutions.

New research from Codat found that 21% of U.S. SMBs surveyed couldn’t access necessary credit in 2022. The report noted that the application process served as a barrier to small businesses seeking funding. According to a Business Wire press release, “Of the SMBs that couldn’t access the credit they needed in 2022, 78% said it was because of problems with the application process. This includes application costs (such as origination fees) being too high, the application process being too complex and it taking too long to receive the funds.”

For SMBs the time it takes to receive capital is paramount and waiting weeks or months could be the difference between keeping the doors open or shutting down operations. With alternative funding solutions, SMBs can receive working capital in days, with more flexibility and competitive rates, and some lenders are even offering a chance for companies to earn additional revenue through revenue-sharing programs.

While our current economic state is experiencing uncertainty, there isn’t a need to panic. Now is the time to get smarter. Thoroughly vet all your funding options; understand the stipulations tied to each investment; talk to multiple lenders; and seek out alternative funding solutions – it might be your smartest investment yet.

This article originally appeared in The Kansas City Business Journal.