Small Businesses

The surprising way banking issues may impact your small business

  • 5 min Read
  • March 31, 2023

Author

Escalon

Table of Contents

The collapse of Silicon Valley Bank and Signature bank, plus the stumbling of other major banks around the world, has many small business owners concerned about the long-term impact of rising interest rates, spiking inflation and tighter banking regulations. 

As the United States’ top banking and financial regulators meet to discuss the state of American banks, there is a strong possibility that they’ll recommend greater scrutiny for both large, corporate banks and small, local banks across the country. And those restrictive policies could have a significant impact on how small businesses access capital, starting as soon as late 2023.

Schedule a call today
If your business works closely with a bank, here’s what you need to know about the shifting sector:

Interest rates are putting extreme pressure on small businesses’ banks


Banks across the country, and around the world, have been growing exceptionally fast over the past few years as businesses increase their deposits and more startups enter the market. Those growing banks typically use their depositors’ money to purchase government bonds as a way to earn steady interest on a relatively low-risk investment. But as interest rates rise and the value of bonds falls, banks can quickly find themselves in a losing position. 

Over-leveraged and mismanaged banks run into a significant problem when too much of their capital is tied up in bonds that are currently selling at a loss. When depositors pull their money back out, the bank is forced to sell its investments for less than it purchased them. And when the public realizes the bank’s tenuous position and rushes to withdraw their cash while the bank still has some, the resulting bank run can almost instantly collapse the institution. 

Properly managed banks are better insulated from interest rate fluctuations. But for everyday small business owners, it can be difficult to tell the difference between a safe, reliable bank and one taking high-risk positions. And with the Federal Reserve raising rates again in March, for the ninth time in a row, banks are facing increasingly high pressure. 

Bank withdrawals are slowing, but the U.S. banking system isn’t out of the woods yet


According to Treasury Secretary Janet Yellen, major withdrawals by small businesses and individuals with significant assets have leveled off, and the threat of a national bank run seems small. But a proposed rule by the Consumer Financial Protection Bureau could change the way banks, and particularly small financial institutions, lend to small businesses. 

The provision, called the Small Business Lending Data Collection Rule, will require banks to collect more information about the businesses they lend to, in order to monitor lending discrimination, lending laws, and the credit needs of small businesses. While this rule has been a part of lending law for nearly a decade, it had been largely ignored until 2019, when a consumer advocacy group sued the bureau for failing to enforce it.

Talk to us about how Escalon’s experienced, essential business services can help your firm stay resilient through tough economic times.

 

If the rule goes into effect, it will have a major impact on the cost, data collection and paperwork required to complete a small business loan. Today, these small institutions aren’t required to collect or report any demographic information about the businesses they serve. But starting in July 2024, if the rule is enforced, these institutions will be required to collect and publicly report data on the size, revenue and demographics of the small businesses they support. 

Local financial institutions where long-standing relationships play a big role in lending practices say the new rule will make it more expensive to lend to small businesses, and may result in fewer loans issued if businesses don’t wish to share their sensitive information. But those in favor of the regulations say greater transparency about which small businesses receive credit will help women- and minority-owned businesses have greater access to the capital they need.

Moving forward, expect banks to become more conservative, and loans harder to qualify for


Banks are watching the same headlines as small business owners. They see a potential recession on the horizon, major layoffs across many industries, rising inflation and skyrocketing costs. They see businesses having to work harder and think smarter just to maintain their performance. And it’s likely this caution will lead to tighter lending practices that limit what some small businesses can qualify for. 

As lending slows, business growth slows. And slower business growth can bring the whole economy to a halt. That course reversal has the potential to correct inflation, but it can also trigger an economic downturn that takes years to recover from. 

Whether the latest banking disruptions and increased regulations trigger a recession, or just result in a little extra paperwork, there’s no question — small businesses should be prepared for the potential for tougher lending practices and reduced access to capital. There’s hope for these growing businesses, but it may take extra effort to secure the loans and lines of credit you need to keep your company running. 

Want more? Escalon provides comprehensive back-office solutions to small businesses to cope with difficult economic situations. Escalon’s services support firms with outsourced finance, accounting, human resource, risk management and compliance. Talk to an expert today.

Schedule a call today
This material has been prepared for informational purposes only. Escalon and its affiliates are not providing tax, legal or accounting advice in this article. If you would like to engage with Escalon, please contact us here.

Talk to our team today to learn how Escalon can help take your company to the next level.

  • Expertise you can trust

    Our team is made up of seasoned professionals who bring years of industry experience to the table. You gain a trusted advisor who understands your business inside out.

  • Quality and consistency

    Say goodbye to the hassles of hiring, training and managing in-house finance teams. You will never have to worry about unexpected leave of absence or retraining new employees.

  • Scalability and Flexibility

    Whether you’re a small business or a global powerhouse, our solutions scale with your needs. We eliminate inefficiencies, reduce costs and help you focus on growing your business.

Contact Us Today!

Tap into the latest insights from experts in your industry

Accounting & Finance

Financial Planning for the Future, Setting Long-Term Business Goals

While small businesses must handle day-to-day tasks—like managing payroll or closing monthly books—long-term planning is the compass that keeps them...

Read More
People Management & HR

Benefits Administration, What Small Business Need to Know

Benefits administration can be a game-changer for small businesses aiming to attract and retain top talent. While salaries remain an...

Read More
Accounting & Finance

AAP vs. Cash Accounting: Which Method Is Best for Your Growing Business? 

Choosing the right accounting method can significantly impact how you track financial performance, manage taxes, and plan growth. Two common...

Read More
Accounting & Finance

Beyond Bootstrapping: Advanced Cash Flow Management for Scaling Companies 

Bootstrapping—financing growth through internal cash flow—is a hallmark of many successful startups. But as businesses mature past their initial stage,...

Read More
Technology & Security

Building a Scalable Tech Stack: How to Choose the Right Tools for Growth 

In today’s business landscape, technology is more than a convenience—it’s a strategic asset that can supercharge growth. But as you...

Read More
Accounting & Finance

How to Reduce Month-End Close Time Without Sacrificing Accuracy 

The month-end close can feel like a perpetual scramble—collecting invoices, reconciling accounts, fixing last-minute errors. A drawn-out close not only...

Read More
uncategorized

How to Reduce Overhead Costs Without Impacting Productivity 

Overhead costs—from utilities and rent to administrative staffing—can quietly swell until they erode profit margins and slow your ability to...

Read More
Accounting & Finance

How to Structure Your Finance Team as Your Business Scales

Growth triggers a tidal wave of financial complexity, multi-entity operations, new product lines, overseas expansion, or investor relations. If your...

Read More
Accounting & Finance

M&A Readiness: How to Prepare Your Financials for a Successful Acquisition or Sale 

Mergers and acquisitions (M&A) can dramatically alter a company’s trajectory—unlocking new markets, technologies, or customer bases. Yet, many deals stumble...

Read More