The banking crisis of 2023 has caused a ripple effect across the global economy, leaving small business owners feeling worried and uncertain about their future. As the turbulence around banking continues, small business owners need to take heed and adopt some precautions for the months ahead.
The Banking Crisis Of 2023
The banking crisis of 2023 began with the downfall of Silicon Valley Bank (SVB).
The past decade has seen remarkable growth in the tech startup industry, with venture capital and other investments pouring into innovative companies. Many of these companies put all their money into SVB. This influx of funds gave Silicon Valley Bank an unprecedented challenge to manage. With billions of dollars flowing in, and no one borrowing, they had to develop new processes to invest the money instead.
Government issued bonds can be a sound idea for a long-term investment. However, these bonds can become financially unfeasible. If interest rates are high and the bond holder wishes to sell their bonds before maturity, they will suffer losses. SVB made a series of disastrous investments in government bonds that cost them billions.
In response to this financial disaster, the Federal Reserve imposed stricter regulations on banks across the country to protect against similar situations in the future. Banks were now required to have more capital and hold more reserves, while also being subject to regular examinations.
This created a major problem for smaller regional banks who had fewer resources available to comply with the new regulations. This caused many regional banks to close their doors, leaving customers without access to their funds for weeks at a time. The resulting credit crunch made obtaining loans and financing almost impossible for businesses, resulting in a huge economic downturn.
In addition to the regulations imposed by the Federal Reserve, state governments across the country introduced their own set of rules designed to prevent similar banking disasters from happening again. These regulations included tighter lending requirements, higher reserve ratios, and more frequent examinations by government agencies.
How Does The Banking Crisis Affect Small Business Owners?
The banking crisis has a significant emotional impact on small business owners across the country. Many of these businesses were already struggling due to the economic struggles caused by the pandemic that started in 2020. The sudden collapse of many banks creates an even bigger setback for these businesses.
- Difficulty in accessing credit: It may become more difficult for small businesses as they are now deprived of access to credit from banks, which is vital to their functioning. Banks have become much more cautious in lending money due to the increased risk associated with the current economic environment, which has been exacerbated by the pandemic. This has made it increasingly difficult for small businesses to secure the financing they need to fund their operations.
- Decline in consumer spending: Word of a recession, and the lack of access to funds, has caused a sharp decline in consumer spending as people become more cautious with their spending, which has in turn caused a decrease in revenue for many small businesses.
- Increased financial uncertainty: A banking crisis can have a wide-reaching impact on small businesses, not just through the economic uncertainty it can create, but also by directly affecting their loan agreements. If a small business has a loan with a bank that goes bankrupt or merges with another bank, the terms of the loan agreement could change drastically and may even be rendered null and void. This could leave small businesses in an impossible financial situation, unable to access the capital they need to stay afloat and continue operating their business.
What Can Small Business Owners Do?
While the banking situation may create challenges for small business owners, there are steps they can take to mitigate its impact.
- Build cash reserves: Small business owners should aim to build cash reserves to help them weather any financial storms. This can help them cover expenses in case they face difficulty accessing credit or a decline in consumer spending. A sound practice, though difficult, would be to maintain 1/3 of the typical monthly expense amount as an emergency fund.
- Diversify accounts: By spreading investments across different banks, small businesses can reduce the risk of losing money if one bank fails or experiences a financial crisis. Banks offer different interest rates and terms, so it is important to research which products and services each one offers in order to find the best option for your business.
- Consider alternative borrowing options: Alternative lenders provide capital to businesses in the form of loans, lines of credit and other financing when traditional banks are unable or unwilling to lend. Alternative lenders provide more flexible terms than traditional banks and can be a great option for businesses that need capital quickly or can’t acquire funding from the bank.
- Stay informed: Business owners should stay informed about the banking crisis and its potential impacts. This can be done through industry news sources, online forums, or even a financial advisor. Keeping up to date on developments in the economy will give business owners a better understanding of how the crisis may affect their operations and allow them to plan accordingly.
The banking crisis is a threat that could prove disastrous for small business owners. Small businesses are particularly vulnerable to upheaval due to their limited resources, and it is essential that they begin to prepare now. By building cash reserves, exploring alternative funding options, and diversifying funds, small business owners can position themselves for success even during uncertain times.