Don't wait for the next bank crisis to protect your payroll
The collapse of Silicon Valley Bank last week put many employers in a difficult spot: How were they going to pay their employees?
For many businesses that banked with SVB, managing payroll involved getting funds directly from their accounts, or working with payroll providers that partnered with the mid-size bank. While the federal government quickly ensured that depositors would have access to their funds within days of the closure, President Biden’s comments on the matter pointed to the financial strain many business owners — and their employees — were facing when the payroll process was in jeopardy.
“Small businesses across the country that deposit accounts at these banks can breathe easier knowing they’ll be able to pay their workers and pay their bills,” Biden said in his remarks. “Their hard-working employees can breathe easier as well.”
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While potential disaster was averted this time, employers should use this as a wake up call to look at their payroll processes and have contingency plans in place to free up cash immediately, says Matthew Kim, CEO and founder of insurance technology company SureCo.
“Before Biden had said that he was going to make sure that all deposits were going to be safe, I think the fears were very real,” Kim says. “After the financial crash in 2008, there were a lot of compliance and regulatory pieces that were put in place. But being part of the tech startup ecosystem, there definitely needs to be additional controls and compliance.”
Unlike larger banks, Silicon Valley Bank was designed for startups and investors in those companies to take out loans and store funds directly with the bank. Ninety-five percent of SVB’s deposits were uninsured as of December, according to the U.S. Securities and Exchange Commision. While all funds have been protected by the Federal Deposit Insurance Company, Kim recommends that businesses expand their financial footprint as they assess their strategies.
“The reason why a lot of the startup community or entrepreneurs go toward a medium sized bank is because they get a certain level of personal service they’re looking for, even if they don’t have credit,” Kim says. “But as they grow as a business and have more cash and more established growth, don’t put all your eggs in one basket — work with multiple banks that are much larger that would have a lot more security checks in place.”
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Going forward, leaders should be quick to communicate with their employees as any financial situation unfolds, says Curtis Tatum, in-house counsel and director of federal payroll compliance at the American Payroll Association.
“If you think you’re not going to make payroll, be honest with them, be transparent,” Tatum says. “Let them know what’s going on and try to try to reassure them as best you can as to what you think your future is.”
Beyond that, business owners should follow a “standard playbook” in order to stay solvent and keep cash at hand, Kim says. But that might mean making some difficult decisions in order to pay the bills.
“There are some basics that a lot of founders and executives need to be looking at to save the company and be cash-forward,” Kim says. “What that means is a little bit less investing on long-term innovation or on long-term bets and more about the here and now, because cash is king.”
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As businesses look to recalibrate, that may require layoffs, or shutting down projects to free up dollars, Kim says. In the longer-term, it’s about reassessing how a business is allocating money toward benefits like healthcare, cutting back on unused tech tools or even switching to remote or hybrid work to save on business expenses.
If impacted by the SVB closure, employers should keep diligent records of how they’re managing the crisis. While relief is available from the federal government, it could be contingent on what a business owner did to manage the situation at the moment.
“California just put out relief for employers that weren’t able to make their payroll tax deposits on time, due to the circumstances,” Tatum says. “Document everything that you’re doing. Because down the line, some of that relief may be contingent on showing good faith or showing what happened and that you took the steps to try to mitigate whatever damages you could be liable for.”
