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How Leaders Can Diversify Lending/Banking Relationships

Mar 16, 2023

On Friday, March 10, 2023, the Federal Deposit Insurance Corporation (FDIC) shut down Silicon Valley Bank (SVB), followed quickly by the closure of Signature Bank. These events shook up the entire banking industry, as well as the U.S. and global economies.

Any businesses with loans, lines of credit, or banking accounts from these institutions were left facing major uncertainty of whether they would have any access to their funds, until the Federal Government announced so on Sunday, March 12, 2023.

A key learning point from this situation is the importance of diversifying your standing with banks by developing multiple lending and depositor relationships with different institutions. Aside from protecting your businesses from full exposure to uncontrollable events like we’ve seen with Silicon Valley or Signature Bank, this also allows you to stay flexible with where you source funds for capital investment.

Unfortunately, developing multiple banking relationships is not something business leaders can do overnight. Generally, a traditional lender requires most, if not all, of their customer’s deposits to be with their institution. Though, if you have a strong-enough balance sheet and can prove the long-term health of your business, you can certainly ask for a variance to this requirement.

Though, keep in mind, this concept should be a two-way street. If a bank is going to continue to request that you meet this condition, ask them to give comfort in their future security and health as an institution. It may be an uncomfortable question for a business owner to ask a big bank; but if they require a significant percentage of your assets, they owe you the same confidence. Many times, asking tough questions helps the other party gain additional respect for you and your situation.

Parenthetically, if the lender cannot provide a satisfactory answer, it should raise your concerns even more. If this is the case, you’re likely not the first person to raise this concern. The irony is, amongst other issues, SVB and Signature suffered from non-diversified concentrations in tech and cryptocurrency. The further irony is, had some of these tougher questions been asked, the outcome and outlook may have been significantly different.

A final thought for now: If you have significant deposits with your preferred lender that exceed your loan balance or the loan balance is fully collateralized, there should be very little pushback about your request to diversify, especially considering the current events. Give it a shot, the worst they can do is say no, which then should raise new questions regardless.

At the end of the day, whether it’s internally within your own operations, or with external advisors and especially lending partners, the first step to being proactive is asking the right -- and sometimes difficult -- questions.

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Robert D. Katz

Robert Katz CPA is a Managing Director of EisnerAmper Financial Advisory Services Group, and works with public and private companies, in and out of bankruptcy, to create and execute the strategy needed to restructure or improve operating performance.

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