Silicon Valley Bank
Business lessons can be learned from SVB’s collapse.

Written by Dalton Hopper, CFE, CVA

At first glance, it was believed that the collapse of Silicon Valley Bank (SVB) would be an isolated event. However, in the days after SVB’s collapse and as evidenced by the federal government intervention, it’s clear that the collapse of SVB has the potential to touch the entire U.S. economy. In the aftermath of the collapse, there are key lessons that businesses can learn.

1. Understand your customer risk.

One of the factors that may have led to the SVB collapse was that a large concentration of its customers belonged to one industry: technology. It’s no surprise that a bank with Silicon Valley in its name served the technology space, but the industry that helped the bank to become the 16th largest in the country, also possibly contributed to its downfall.

When technology companies began to feel economic pressure and the venture capital funds were not flowing as freely as they had in the past, technology customers began drawing more on their deposits to meet payroll and other needs than they had previously. While this event did not create a run on the bank, it may have been one of many factors that led to SVB’s downfall.

The lesson to be considered here is regarding your customer concentration. Does your customer concentration mitigate or increase your risk? While there is no specific way to test this, it is prudent to understand the impact that one, two, or three of your largest customers could have on your business.

2. Size matters.

Another possible component of SVB’s failure was related to its size. While larger banks are subject to additional regulatory and liquidity measures, regional banks like SVB, are not subject to the same heightened requirements. The same can be true for small to medium-sized businesses. While small businesses may not be subjected to as many regulatory requirements as large businesses, they may still be presented with the same, if not more, risk than larger businesses.

One area that may pose a higher risk for a smaller business is that a smaller business may need to depend on higher returns to attract investors. These increased returns could help investors justify the additional risk that investing in a smaller business could bring. The SVB collapse is a prime example of this scenario.

3. Interest rates can change.

Finally, interest rates can pose a significant risk to businesses of all sizes, especially in periods of rising interest rates. SVB was impacted by holding long-term government bonds that were worth less than what they originally paid for them due to rising interest rates. Similarly, businesses with debt can be impacted as well.

While notes with fixed interest rates may not pose as much of a risk, debt with variable or floating interest rates can quickly become volatile and could create unexpected consequences. Another aspect of this to consider is refinancing. Loans that businesses may periodically refinance will now be refinanced with a higher interest rate than before. This is especially true for businesses that obtained loans in the past several years when interest rates were at a historical low.

Today’s higher interest rates could reduce a business’ cash flow and pose a significant challenge to investing in and expanding the business.

Each of these factors created the perfect storm scenario for SVB to evaporate in a matter of days. Likewise, each of these factors plays a role in valuing a small to medium-sized business. Oftentimes, a business can be the largest asset in an owner’s portfolio and it is crucial to manage these risks just like with any other investment. For a thorough analysis of these factors and how they could impact your business, please reach out to your BMSS advisor today by calling (833) CPA-BMSS or visiting our website.


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