Lessons To Be Learned From The Silicon Valley Bank Collapse
Published: March 21, 2023
The Silicon Valley Bank (SVB), a bank that catered to tech startups in the area, has become the largest US bank failure since 2008 and the second largest bank collapse in US history. How did this happen? As the stock market boomed and interest rates plummeted in 2021, investors flooded their money into the tech sector. Startups then poured their money into SVB, who then invested a lot of that money in long-dated bonds. At the time, these bonds seemed safe. However, when the interest rates started to rise in 2022, those bonds lost some of their value. So, when investments in tech slowed down and tech startups had to pull cash out of the bank to pay their expenses, SVB had to sell those bonds at a loss to have enough capital for the companies seeking to withdraw their money.
That all would’ve been fine and the bank would have recovered, had it not poorly explained the situation to its customers. These customers got scared that the bank was on a downward spiral. Investors turned around and told the startups in their portfolios to withdraw any money they had in SVB. Other companies saw this and they also began to panic, pulling all of their money from the bank. The Federal Deposit Insurance Corporation (FDIC) had to step in, taking over SVB in order to get its customers access to their money by Monday & protect the US financial system.
What Lessons Can Small Businesses Learn From This?
Essentially, all the lessons boil down to an old proverb: don’t put all your eggs in one basket. Meaning, don’t risk everything you have on the success or failure of one thing. In this case, the companies who chose to put their money in SVB should’ve considered splitting their money into accounts at different banks. Just as well, SVB shouldn’t have invested so much in those long-dated bonds. All-in-all, make smart business decisions and try to plan ahead for when difficult situations inevitably come up.
Have Several Backup Plans
You can’t just have a plan and hope everything works out perfectly. In business especially, you need to prepare for several scenarios, because it’s unlikely that everything will work out according to that plan. When developing your business strategies and particularly when considering your financial investments, make sure to have backup plans in place in case various issues arise.
Choose Your Customers Wisely
Your business shouldn’t be overly reliant on any one customer. Why? Well, what happens if they decide to stop buying? You lose a significant amount of business and risk landing your company in financial hardship. To combat this risk, it is recommended that no more than 10% of your revenue should be generated by one single customer. To prevent a high customer concentration, you can widen the scope of your target market, diversify your client base, and implement policies to discourage clients from changing your business’ standard procedures.
Keep A Stash of Cash
Operating cash, that is. Small businesses need to set aside some operating cash to sustain the business in the event of a banking collapse, economic turmoil, etc. If you find yourself in a financial crisis, you don’t want your business to immediately go under. A common rule-of-thumb here is to save up a cash buffer of about three to six months of operating expenses. This should keep your business up and running in case of an emergency situation or a dip in the economy.
Diversify Your Investments
Diversification is one of the basic rules of investing. While it doesn’t guarantee against losses, diversification aims to minimize losses by investing in various financial instruments and industries that would each react differently to a single event. Spread your funds across various bank accounts and make sure your investment portfolio includes options in different industries with varying risk levels.
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