What if your bank is bust?
How to protect your firm from the fallout of failures in the financial sector
Call it a warning shot. The collapse of Silicon Valley Bank last month plunged many small businesses in the UK into full-blown panic. Rapid intervention by regulators and the government meant businesses were able to keep trading with minimal disruption, and largely without financial loss. But the crisis was a reminder that 15 years after the global financial crisis, businesses are still highly vulnerable to problems in the banking sector.
Is there anything you can do to protect your firm from future failures, given that it is difficult to predict where these might strike? Well, a good starting point is the Financial Services Compensation Scheme’s (FSCS) deposit protection agreement.
In the event that a bank goes bust, taking a company’s money with it, the scheme will normally refund lost deposits of up to £85,000.
The arrangement is often thought of as consumer-focused, but companies, charities and other organisations can claim too. It covers banks, building societies and credit unions authorised in the UK.
However, there are some important caveats. Firstly, if you’re a sole trader and have a personal account with the bank as well as a business account, you’ll only be able to make one claim. If your business is set up as a separate legal entity – a limited company, say – you should be able to make separate claims for both it and your personal account. Similarly, if your business is a partnership, you’ll only be able to make one claim, even though several partners may be named on the account.
Given the FSCS rules, it’s a good idea to limit the money your business holds on deposit at any bank to no more than £85,000. That may not be possible for firms with larger turnovers – they may have large sums coming into and going out of the account on a regular basis – but it is sensible to split long-term funds between several banks.
However, avoiding the disruption on day-to-day operations that a bank failure could have is less straightforward. Businesses need constant access to banking services in order to bank receipts, and pay suppliers and employers. So even a few days of upheaval could be highly damaging.
Here, your best option is to think very carefully about your choice of bank in the first place. New entrants to the industry have provided important competition to the incumbents, but are you confident in their longevity? In particular, don’t pick a bank simply because many of your peers are using it. One particular problem at Silicon Valley Bank was the high concentration of technology businesses. Similarly, tread carefully with banks headquartered outside the UK – they may be subject to less stringent regulation in their home markets.
It also makes sense to have a fallback plan. One option is to open a business account with an alternative provider. You could move all your banking to it if there was an emergency with your main bank. This will inevitably be more administratively complex, but it could provide important protection. At the very least, holding an emergency pot of cash with a different bank could buy you valuable breathing space in the event of a problem.
“A key problem at SVB was the concentration of technology firms”