In the aftermath of Silicon Valley Bank’s (SVB) collapse, its customers, their partners and any business whose deposits are not fully insured have been scrambling to find more secure solutions to ensure their liquid accounts are readily accessible.
Cash at risk for many SMBs due to FDIC limits
The truth is, for a small or mid-sized business, the levels of FDIC insurance are low — commercial accounts are insured at the same level as those of individuals. While $250,000 might be adequate for a household (and once individuals start to build wealth and use financial advisors they diversify as well), it’s a problematic threshold for a business with any kind of significant expense. The Federal Deposit Insurance Corporation is a U.S. government agency that protects bank depositors against the loss of their deposits in the event of bank failure; a full list of FDIC-insured banks is available here. Per depositor FDIC limits haven’t been revised since 2008, when they went from $100,000 to the current $250,000.
Deposit insurance and coverage limits
Single Accounts (owned by one person): $250,000 per owner
Joint Accounts (owned by two or more persons): $250,000 per co-owner
Certain Retirement Accounts (Includes IRAs): $250,000 per owner
Revocable trust accounts: $250,000 per owner per unique beneficiary
Corporation, Partnership and Unincorporated Association Accounts: $250,000 per corporation, partnership or unincorporated association
Irrevocable trust accounts: $250,000 for the non-contingent interest of each unique beneficiary
Employee benefit plan accounts: $250,000 for the non-contingent interest of each plan participant
Government accounts: $250,000 per official custodian
Consider the case of a $10 million (revenues) manufacturing business. A rule of thumb is that annual expense is around 40% of revenue — in this case $4 million. The business typically might keep six months of expenses as cash on hand, or $2 million. Subtract the $250,0000 FDIC insurance limit, and the business is left with $1.75 million in uninsured cash balances.
Banks fail more often than you may think
While a run on deposit or bank failure are perceived as rare, more banks fail than you may think. According to the FDIC, of the 4,326 banks in the U.S., 563 failed between 2001 and 2023.
“The big lesson [from SVB] is that you can’t assume that a bank is too big to fail. You have to be in position to have your cash as diversified as you can,” Myomo CFO David Henry recently told The Wall Street Journal.
Finance leaders are concerned about their uninsured deposits
In short, the risk is real, and huge sums of commercial deposits remain uninsured. And finance leaders are actively concerned about these matters and exploring the options available to them. A March 16, 2023 survey of CFOs conducted by Gartner found that:
- 85% are concerned about the impact of failures on operations
- 28% plan to diversify their deposit base across more and new banks
- 17% want to improve cash visibility
Sam Jacobs of Pavilion polled CEOs immediately after SVB failed and posted the results to LinkedIn. He found:
- 76% of CEOs that had deposits with SVB had over $1M
- 10% had over $50M
- 76% were not able to get any money out prior to the weekend
- 27% received a heads up from their investors earlier in the week. 73% didn't
- 20% received nothing at all from their investors — no guidance, no insights, no updates, no briefings
What is diversification?
“Under FDIC rules, all deposits owned by a corporation, partnership or unincorporated entity (including a for-profit or a not-for-profit organization) at the same bank are added together and insured up to $250,000, separately from the personal accounts of the owners or members,” the FDIC states on its website.
If a company banks with more than one FDIC-insured financial institution, they can get the same level of insurance protection for each account. To increase the level of insurance on excess cash, a business needs to diversify its deposits across multiple banks so that no single one holds more than $250,000. So is it good to have multiple bank accounts? The answer is likely a firm "yes" for many SMBs.
Next steps: How is the market evolving to fill this need?
Diversifying your deposit base across banks insulates a business and mitigates the potential risk to their liquidity. But it’s not without cost — notably in terms of convenience, visibility and reporting.
New solutions are coming to market in response to recent events, which offer simple and same-day money movement between accounts, full visibility over liquidity, fraud mitigation capabilities and higher interest income as well as significant increases in insurance.
Diversification and managing risk
Silicon Valley Bank’s failure caught its customers off-guard. But risks like these can be managed.
Some banks offer accounts to diversify deposits, but generally speaking banks are in the business of amassing and holding deposits rather than creating products to spread liquidity across financial institutions that likely include their competitors.
What is a sweep account?
Sweep accounts are bank accounts that automatically transfer funds to ensure excess cash is moved into different accounts. Business sweep account benefits are two-fold.
1. Cash is generally swept into an account with a higher interest rate, often a money market fund.
2. Cash is distributed such that the total liquid assets are insured by the FDIC, because no single account balance is above the $250,000 limit.
As Shiva Rajgopal recently wrote in Forbes, there are red flags to look for when evaluating banks (“There were at least six red flags in SVB's public filings since 2021,” he noted in an associated LinkedIn post), and policy requires adjustments to address the realities of the current market. Assessing the risks is complex, and governments are slow to act — in the near term making the most of the options presently available and protecting your business’ most valuable asset – cash — is critical.