Conflicting Signals About Banks
As the turmoil continues, more business owners consider shifting deposits, changing banks, and rethinking growth strategies. Ami Kassar will take questions from 21 Hats Founding Members.
Good Morning!
Here are today’s highlights:
Will it be harder for small businesses to get loans? Will that slow economic growth?
The demise of SVB is likely to have a big impact on immigrant entrepreneurs.
Meanwhile, the confluence of a housing crisis, a mental health crisis, and the opioid epidemic is landing at the doorstep of business owners.
Third-party sellers are getting squeezed by higher prices.
BANKING
Businesses are shifting deposits and asking tough questions: “Some owners of small and midsize businesses are moving funds to other institutions, splitting them between multiple banks, moving cash into money-market funds, or buying Treasurys. Others are more closely reviewing the finances of their banks, while some entrepreneurs are even thinking about the potential risks for key partners and customers. Responding to the recent banking-industry turmoil is particularly challenging for small businesses, which typically don’t have large finance teams or sophisticated cash-management strategies. Small-business owners with conservative habits often keep lots of cash on hand as a cushion. Loan restrictions can make it tough to split that cash among multiple institutions.”
“‘I think we need to analyze banks just like they analyze us,’ said Brent Frederick, owner of Minneapolis-based Jester Concepts, which has five restaurants including Butcher & the Boar and a concession operation that includes food trucks, a food trailer and stadium locations. ‘What is the bank’s core value? What do their balance sheets look like?’”
“Loan covenants can present another challenge for companies rethinking cash management. Peter Elitzer, CEO of Huck Finn Clothes Inc., which has about 600 employees, said his loan agreements have typically required his company to keep all of its deposits with the lender or, at the least, an amount exceeding the FDIC’s $250,000 standard deposit-insurance coverage limit.”
“Mr. Elitzer said he is asking his lenders to relax the deposit requirements. ‘I’ve begun the conversation and am not getting a great reception,’ he said. ‘They are saying we are so stable. Everyone always is until they are not.’”
“Ami Kassar, CEO of business-loan adviser MultiFunding, said he worries that if customers decide to move funds from smaller banks to larger ones, that outflow could ultimately hurt small businesses by leaving them with fewer lending options.” READ MORE
There is also concern that if banks grow more cautious about their lending it could slow economic growth: “Regulators’ move last Sunday to protect depositors at SVB and Signature, and big banks coming together on Thursday to shore up First Republic with a $30 billion infusion of deposit cash, were aimed at avoiding such an eventuality. With hope, these fire lines will hold. Even if any outflows are halted or reversed, small banks may now grow cautious, such as by simply sitting on more of their cash as a defensive measure. Doing so would effectively reduce their capacity to extend credit.”
“For small and midsize businesses that rely on smaller banks, this would be worrisome, says Raghuram Rajan, an economist at the University of Chicago’s Booth School of Business and former governor of India’s central bank. Loans to them are often based on so-called soft information that local lenders have built up over years. ‘These are loans built on strength of character and a handshake,’ Mr. Rajan says.”
“Banks in the U.S. outside the 25 largest banks by domestic assets represent close to 40 percent of all bank lending—but about two-thirds of commercial real-estate loans, according to Federal Reserve data. They represent about 70 percent of construction and land development loans, and more than 90 percent of all loans secured by farmland.” READ MORE
THE 21 HATS PODCAST: DASHBOARD
Bank As I Say, Not As I Do: This week, in the aftermath of the Silicon Valley Bank collapse, Gene Marks says he banks at Wells Fargo — but that’s not what he recommends. His suggestion: Find a good community bank, spread your money around to play it safe, and then relax. He also says you should consider going to a four-day work week. And not because it’s good for your employees, but because it’s good for you.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Ami Kassar speaking at an Inc. event.
GET ANSWERS TO YOUR BANKING QUESTIONS
On Monday, March 27, at 5 p.m. ET, Ami Kassar, CEO and founder of MultiFunding, will take questions from 21 Hats Founding Members. For years, Ami has been telling business owners that they should do their banking with smaller, regional banks. Does that advice still hold when so many are moving their money to the big banks in search of stability? What other advice does Ami have for payroll or credit cards or anything else? Bring your own questions to this Zoom discussion! This is the first in a series of 21 Hats Office Hours that will give Founding Members the opportunity to interact with the 21 Hats podcast regulars and other special guests.
FINANCE
Thinking of taking a merchant cash advance? Make sure you know how to calculate the true APR:
The collapse of SVB will have a big impact on immigrant entrepreneurs: “Silicon Valley Bank, which had $189 billion in deposits at the end of 2021, was known for its founder-friendly policies, many of them especially helpful for immigrants. It accepted customers without Social Security numbers, provided first mortgages to entrepreneurs who might not meet a larger bank’s traditional criteria and helped early-stage founders get business credit cards that weren’t tied to their personal credit. Those practices made it the bank of choice for many founders — it serviced nearly half of all U.S. venture-backed startups — and popular among immigrant founders.”
“‘For every immigrant founder I know, among the Indian and Chinese community in Seattle, it was their first bank,’ says Xiao Wang, co-founder and CEO of Boundless Immigration, a startup that uses software to cut the costs of doing immigration paperwork for visas and green cards. ‘SVB took chances on founders in a way that no traditional banking institution would do.’”
“Because immigrants create so many companies, any fallout on them would have a disproportionate impact on the innovation economy. ‘Immigration has been the lifeblood of our economy,’ says Jeff Housenbold, former CEO of Shutterfly and venture capitalist at SoftBank who now runs his own investment firm Honor Ventures.”
“‘We’ve made that difficult with immigration [policy] and with things like SVB not being there anymore. You don’t feel that as a society overnight, but we’re not going to get those Horatio Algers of the world. It will be harder, not impossible, for them to come and get started.”
“Rajat Bhageria, founder and CEO of Chef Robotics, says that while the immediate cash crisis of Silicon Valley Bank is over, he’s already cut back his plans for the year to focus on costs. While that’s not specific to being an immigrant, any cuts could have a disproportionate impact on immigrants, who rely on H-1B visas tied to their jobs to stay in the country.” READ MORE
Elizabeth Spiers, a founder and SVB client, blames the venture capitalists: “I opened my account at SVB in 2017, when I had meetings lined up with some top-tier VCs to raise money for a digital media company. Like everyone else who heads to Buck’s of Woodside (a favored venue for early-stage deal making) with a deck and a dream, I tried to anticipate the screening mechanisms and make sure I passed. And despite the fact that I was not a first-time founder, had worked in tech and tech-adjacent companies and was decently well networked, I suspected they might regard a 40-year-old woman without an engineering degree as not quite the culture fit of their dreams. I wasn’t contractually obligated to bank with SVB, but as with so many other unspoken norms, I was aware that I would be evaluated by my choices.”
“As I hit refresh on my account balance Monday morning, I was thinking of the high-prestige venture capitalists who herded start-ups like mine to SVB.”
“They’re the reason the bank was so overloaded with risky clients, and they’re also the ones who panicked at the first rumors of trouble and advised their portfolio companies to flee, initiating the bank run that brought the whole thing tumbling down.”
“The hubris of high-profile libertarians who howl for regulatory intervention (‘Where is Powell? Where is Yellen? Stop this crisis NOW,’ tweeted Craft Ventures’ David Sacks) after previously coming out against it is all the more galling.”
“I expect that as soon as the system stabilizes, they’ll all develop amnesia and return to insisting that government intervention destroys innovation.” READ MORE
PROFILE
Caught in three spiraling national crises, the owners of a sandwich shop in Phoenix fight to survive: “[Joe Faillace] looked out the window toward Madison Street, which had become the center of one of the largest homeless encampments in the country, with as many as 1,100 people sleeping outdoors. On this February morning, he could see a half-dozen men pressed around a roaring fire. A young woman was lying in the middle of the street, wrapped beneath a canvas advertising banner. A man was weaving down the sidewalk in the direction of Joe’s restaurant with a saw, muttering to himself and then stopping to urinate a dozen feet from Joe’s outdoor tables. ‘It’s the usual chaos and suffering,’ he told [his wife, Debbie]. ‘But the restaurant’s still standing.’”
“That had seemed to them like an open question each morning for the last three years, as an epidemic of unsheltered homelessness began to overwhelm Phoenix and many other major American downtowns.”
“Cities across the West had been transformed by a housing crisis, a mental health crisis and an opioid epidemic, all of which landed at the doorsteps of small businesses already reaching a breaking point because of the pandemic.”
“Joe came into work the next morning and saw a bag of drugs in the road, human waste on the sidewalk, a pit bull wandering the street and blood-soaked napkins blowing toward his restaurant patio, where he and Debbie were scheduled to meet with a real estate agent about the future of Old Station.”
“Debbie still insisted that she was ready to be done with the restaurant. Joe didn’t want to run it without her, but he also didn’t want to board it up and walk away with nothing. They had spent the past several months exploring a compromise, seeing if they could sell the business and retire together. ‘Are we getting any bites?’ Joe asked the agent, Mike Gaida, as they sat on the patio.” READ MORE
ECOMMERCE
Third-party sellers are feeling the squeeze of higher fees: “Troy Tyson sells collectible music and art items, like prints and vinyls, on his eBay store. Selling on eBay has been his full-time job since 2010. But he says things have gotten progressively more difficult in the last year as sales and traffic declined, inflation has squeezed his margins, and eBay has raised fees. Tyson has had to raise prices twice in the last three years. Most recently, he did a 0.5 percent price increase on all of his products. He estimated that his annual income would have fallen by 4-5 percent had he not raised his prices. ‘Over the past year, my sales have already declined quite a bit, as I know they have for a lot of sellers, so any decrease would be a concern,’ Tyson told Insider.”
“He added that with only two weeks between the announcement of the fee change and its implementation, he felt he didn't have enough time to analyze the price of each of his more than 1,000 items for sale.”
“Etsy raised its transaction fees from 5 percent to 6.5 percent last April — a move that pushed thousands of sellers to go on strike and ask shoppers to boycott the site. Amazon has also steadily raised fees for its Fulfillment by Amazon service since 2020.”
“While its business model is slightly different, in that it does not operate a marketplace and instead provides software for running e-commerce businesses, Shopify is also raising the price of its monthly subscription this spring, by as much as 33 percent in some cases.” READ MORE
THE 21 HATS PODCAST
For Wunderkeks, It Really Is Go Big or Go Home: This week, Hans Schrei explains why he’s pursuing a deal with Costco and why his vision is to get Wunderkeks cookies into every supermarket in the country. When Jay Goltz counters that instead of thinking big, or thinking small, maybe Hans should think medium, Hans says that may no longer be possible with consumer packaged goods: “The little brand that grows and thrives by growing little by little doesn't really exist any more in this space,” he says.
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Thanks for reading, everyone. — Loren