How Silicon Valley Bank's shutdown stressed small businesses

EtsyBL
Etsy temporarily halted some payments following Silicon Valley Bank's closure.

As Silicon Valley Bank collapsed in recent days, many online merchants briefly lost their ability to receive payments, demonstrating the danger inherent in the common small-business practice of relying on a single financial relationship.   

In the wake of Silicon Valley Bank's closure, Etsy, which used SVB to send deposits to some sellers, delayed payments. Shopify also halted payments to sellers on its platform. While these interruptions were fixed following the government's decision to back SVB's uninsured deposits, payment experts say small businesses need to do more to shield themselves from the risks of a bank run.

Small businesses often use e-commerce platforms to sell online and broaden their geographic reach, creating the potential for the type of payment interruption that occurred last week. And smaller merchants usually have accounts at community and regional banks; the Federal Reserve Bank of Kansas City recently found that small businesses and community banks are disproportionately exposed to an economic emergency.  

While small banks are mostly healthy and don't have exposure to technology startups or cryptocurrency, there's still a concern among community financial institutions that fear contagion from SVB's shutdown will extend to their sector.  

Additionally, small businesses tend to have simple financial relationships; Visa research recently found that a third of small-business owners use their consumer accounts to make payments for their business. Both Visa and Mastercard are making efforts to migrate small-business clients to credit cards designed for merchants.  

Part of the challenge for small businesses is staffing; most do not have a large enough team to have experts that focus on payments and counterparty risk. 

"What we've seen is a lot of small businesses don't understand treasury management and only have one bank account," said Jay Jung, founder and managing partner of Embarc Advisors, a consultancy. "We always tell our advisory clients to have multiple bank accounts and to set up ACH, so you can move funds quickly from one account to another if you have to." 

Small businesses run on thin margins, making them vulnerable to an unexpected shock. The average small business has average daily cash outflows of $374 and inflows of $381, according to JPMorgan Chase, which adds that the average small business has a cash buffer of about 27 days.  

The running bank balance of 70% of these businesses would never allow them to operate past 30 days, according to Patricia Carlin, a payments consultant. 

"It's a scary position to put yourself in, but it is part of the entrepreneur journey," Carlin said. "These merchants' entire business depends on those deposits."

Businesses that run on slim margins typically buy supplies to design and build products as the orders come in, Carlin said. 

"Let's say that an Etsy seller had 10 orders the day before the SVB news broke. Then they are told their funds were not going to hit their account," Carlin said. "They can't operate. They can't purchase their supplies, they can't pay for shipping. If they don't deliver on their order, they get a bad review. Those reviews mean everything to the seller."

Carlin says she tells merchants to spread the risk by keeping their relationships with e-commerce platforms and additionally establishing a merchant bank account that transfers funds directly into the small-business owner's bank account on a daily basis. 

One of the more worrisome fallouts from the SVB closure was the temporary uncertainty regarding payroll. If the government hadn't stepped in, there was the risk employees of SVB's clients would not have gotten paid, leading to a potential wave of layoffs and bankruptcies. 

"Missing payroll is a crucial misstep," Jung said. "A majority of people don't know why the SVB meltdown happened. But they're concerned that it may happen again. And they want to know if they're getting their salary." 

The e-commerce platforms that had payment interruptions say the issues were narrow, and operations have returned to normal. 

In an email, an Etsy spokesperson wrote: "We recently experienced a delay in issuing payments to a small group of sellers related to the unexpected collapse of Silicon Valley Bank, approximately 0.5% of our active seller base had their payments delayed on Friday. We've already started processing payments via another payment partner." 

Shopify did not provide comment for this article, though it told other media outlets it uses more than 12 banks to process payments. 

Stripe's support page said the company does not have "direct exposure" to Silicon Valley Bank, though Stripe temporarily suspended payouts to SVB before the government backed SVB deposits. Stripe's Atlas, a product that helps developers start businesses, partnered with Silicon Valley Bank, though Stripe has since diversified its bank partners. 

It's impossible to mitigate the risk of frozen bank funds entirely, said Ben Wright, CEO of Velocity Global, a human resources technology company. Wright advocates that businesses set aside one or two months for payroll as a hedge against an economic crisis. Wright also urged business owners to establish more than one bank account, for redundancy.

"For a small business, that may be hard to do," said Wright, who normally works with larger companies.  

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