By Neil Hare
Recent bank collapses mean banks are starting to change their lending risk models.
If you’re like most entrepreneurs, you look at the Silicon Valley Bank (SVB) and Signature Bank go bankrupt and wondering what it means for your access to capital – but maybe not in the way you originally thought. The question of whether your money is safe with your bank is largely answered in the affirmative by the government. But the question of where you’re going to get an inflow of capital this year if you need it doesn’t look positive.
To date, the explanation for the SVB’s collapse is that it had masses of cash deposits from its early-stage clients during its recent boom, and like most banks, it invested in the safest bet you can make: US Treasuries. The problem was that the SVB bought government bonds with longer maturities, which meant that they could not be quickly and easily converted back to cash.
Ben Lozano, CEO and co-founder of Bay Area fintech startup SMBX and an expert on the bond market, explains: “SVB had a classic liquidity crisis. They extended short-term loans to their customers and bought long-term government bonds at low interest rates. When interest rates rose rapidly, those long-term bonds lost value and were effectively insolvent. Depositors lost confidence and started withdrawing their money.”
It has yet to be determined why the tech community, which is not risk averse, decided that a run on the bank was necessary.
While it largely seems as if there is no endemic banking crisis like in 2008 and everyone’s deposits are safe, banks are already starting to change their lending risk models. This means that your ability to borrow money for a line of credit or invest in your business will be much more difficult for the foreseeable future. Banks will offer less money at higher interest rates and with more demands on your balance sheet.
How to plan for the cash crunch
This crisis may force you to look for alternative sources of funding, so you should plan accordingly. As we learned during Covid, make sure your books are in order. Remember that the vast majority of US companies didn’t getting much or some of that bailout money from the government. The Small Business Administration (SBA) issued approximately 5.2 million Paycheck Protection Program (PPP) loans out of a total of 30 million U.S. small businesses — and that doesn’t include solopreneurs, independent contractors, and handymen.
The main reason companies were excluded from PPP was simply that they did not have their tax returns, P&Ls, balance sheets and other documentation ready in an instant. Preparing these items takes time and money, but not as much as you may think.
Accounting software, such as QuickBooks, is available for as little as $15 per month. Some accounting software also comes with billing, credit card and other forms of electronic payment acceptance, and even marketing tools. Credit card companies not only provide access to capital, but also provide a host of other services and useful information about managing your business. Take a look at Mastercard Master your card And Digital doors programs for example.
Your local community will certainly have resources to find affordable service providers. For example, in Washington, DC, the Nonprofit Housing and Economic Development Coalition (CNHED) provides technical assistance, including free accounting and legal advice to small businesses, among others, to get businesses ready to apply for loans.
Steve Glaude, President and CEO of CNHED said, “There are many organizations at the national and local level that provide free or low-cost technical assistance to small businesses, including Community Development Financial Institutions (CDFIs), which provide a variety of financial products and services to underserved communities. I would advise companies to find a CDFI in their community and start a conversation.”
Other sources include SCORE and the free mentor program, Small business development centers (SBDCs), chambers of commerce and municipal economic development offices.
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Subsidies and banking alternatives for debt financing
So where else should you look for money outside of your bank? To begin with, it is always worth checking whether government funding is available. Covid relief funds, such as the Small Business Opportunity Fund and Pilot Program Community Navigator (CNPP) authorized by President Biden in the US bailout law, are still working their way through the system to state and local governments. The best place to find information about these federal grants is the SBA.
If you can’t find grant opportunities, you can always apply for an SBA loan. While the process is often long and tedious, interest rates are very competitive and risk models are lower than conventional banks.
There are also organizations such as Hi alicethe Accion Opportunity Fundand even private companies want FedEx, which provide small business grants and huge libraries of “how-to” content. These scholarships are often small amounts and are usually given out in lottery format, so they are not overly reliable, but worth a look.
Finally, crowdfunding is now becoming a much more viable debt financing option. For example, SMBX, an online marketplace that connects small business owners with everyday investors, can help businesses borrow $25,000 to $5 million dollars in debt at competitive interest rates with terms ranging from one to 10 years. An added bonus to crowdfunding is that promoting your business as a strong investment is also a unique opportunity to market your products and services. In addition, your investors are more likely to support your business in the longer term and protect their investment.
“We saw a huge increase in issuer quotes in the first quarter of 2023, even before the banking problems started,” says Lozano. “I think businesses are beginning to realize that they can access the capital they need, engage their customers and keep wealth in their communities in a way traditional banks can’t.”
Unfortunately, with inflation still problematic enough to trigger sustained rate hikes from the Fed, the associated banking crisis, the war in Ukraine and other supply chain disruptions, a recession or market downturn this year seems likely. It is critical to learn the lessons of Covid and get your act together. If a storm is coming, it’s time to fix the roof when the sun is shining.
About the author
Neil Hare is a lawyer and president of GVC strategies, where he specializes in small business policies, advocacy and communications campaigns; follow him on Twitter @nehare and further LinkedIn. See more articles by Neil and the full bio at AllBusiness.com.
