How to Protect Business Accounts From Bank Failure

People line up outside of the shuttered Silicon Valley Bank (SVB) headquarters in Santa Clara, Calif., on March 10, 2023. (Justin Sullivan/Getty Images)

The Federal Deposit Insurance Corporation (FDIC) has a track record of paying every depositor their money up to the insured amount when their banks have failed. Each insured bank pays a fee for the coverage, which goes into an account to cover insurance costs.

Generally, FDIC insures accounts for up to $250,000. Personal and business accounts are treated the same, and each account type is covered for the same amount. In the case of couples having joint ownership, the coverage is doubled.

Create Separate Accounts

The FDIC advises business owners to create separate business accounts from their personal accounts for tax purposes. It enables your business and personal accounts to be insured separately. Sole proprietors are different; the combination of personal and business accounts is insured for a total of $250,000.

The insured ceiling of $250,000 holds true for individual banks. If you have $450,000 in a single account, you have $200,000 that is not insured. If the $450,000 is split between two banks with $225,000 in each, all the money would be covered.

The FDIC agreed to cover all deposits made to the Silicon Valley Bank (SVB) and the Signature Bank when they failed. It includes deposits and all account sizes—regardless of whether or not they were within the $250,000 limit.

How the FDIC Pays After a Bank Fails

When an FDIC-insured bank closes, the agency offers the bank up for auction, and the new bank takes over the accounts. Money held in the failed bank is usually made available to depositors at the new bank within two days. If no bank buys the old bank and takes over the accounts, the FDIC uses its money to pay depositors by check.

Some accounts require more documentation before releasing the money. The FDIC says that trust agreements—money held by a fiduciary for an owner, and other situations—need more paperwork before understanding the amount of insurance coverage.

When more than $250,000 is in a single account, the FDIC pays the insured amount immediately. The closed bank will provide a receiver’s certificate to the FDIC to prove the additional amount was deposited. Once verified, a check for the balance is issued.

Accounts Not Covered by the FDIC

Many businesses will have their corporate accounts covered if their bank fails—but some are not. According to Investopedia, the business must be organized under applicable state laws. A business entity created to increase FDIC coverage is not insured.

The FDIC only insures certain types of accounts. Bank insurance covers checking and savings accounts, certificates of deposit (CDs), money-market funds, money orders, and cashier’s checks. Accounts not covered include investments in stocks, mutual funds, and bonds, the contents of safety deposit boxes, Treasury securities, cryptocurrency accounts, and life insurance policies. Losses caused by theft are also not covered.

Three Options for Million-Dollar Companies

• The Maxsafe Option

Wintrust offers a program called MaxSafe that will insure your money through the FDIC up to $3.75 million. This level of coverage is for each account holder. They spread your money over 15 banks in their network and let you choose how you want to invest it, whether in CDs or a money-market fund.

• The IntraFi Network

When your business has large amounts of money to deposit, you need specialized services to handle your large deposits. The IntraFi company, NerdWallet says, offers two services to handle your deposits: the Insured Cash Sweep and the Certificate of Deposit Account Registry Service. These two services spread your deposits over multiple banks and deposit only $250,000 per institution to keep your money insured.

Although you could deposit the money in different banks personally, IntraFi can save you time. It enables you to deposit your money in one bank, then they disperse it for you to multiple banks, keeping accounts within the $250,000 insurable limits.

• Use CDARS to Protect Millions

Another program that will protect millions of dollars is called the Certificate of Deposit Account Registry Service (CDARS). Forbes says this is a network of banks that creates CDs for you in multiple banks. You need to sign a placement agreement with CDARS and a custodial agreement. Since your money is put into CDs, you would not want to tie it all up until they mature.

What to Do When Your Bank Closes

NerdWallet suggests keeping emergency funds at a separate bank from your business accounts. Your funds in this account should equal a month’s worth of expenses—and possibly more. If your bank fails, it gives you access to funds to meet your needs.

Remember that if you make loan payments to the failed bank, you are still responsible to pay them. You must continue to make payments at the “bridge bank” (the new bank) when it starts handling your accounts.

Handling Payroll

A bank closure can lead to problems when your business needs money for payroll and accounts payable, etc. It can be even more pressing when your payroll funds are locked up at payroll time. Ideally, having a secondary way to pay your employees will avoid this problem. Creating another account for this purpose at a separate bank eliminates this possibility.

Check the Financial Status of the Bank

Before opening a business bank account, check the bank’s financial status. Ensure it is stable and able to handle its customers’ funds and demands. Be careful of banks that focus heavily on a single sector; SVB, for example, focused on startups in the tech sector. You also want to check and compare fees, checking fees, and the cost of any other services you need. Also find out if the bank is FDIC insured—which you can do at the BankFindSuite, which is run by the FDIC.

Besides ensuring that your business accounts are safe and protected by the FDIC, you also need to work with the bank to employ various tools to help protect your accounts from other issues. Your bank can advise you on steps you can take to protect your money from hackers, employee abuse, etc.—if they have access.

When you have business accounts at more than one bank, it ensures that you have access to funds, even when one bank should fail. Remember that even large ones can fail (e.g., SVB). Since no one knows the fallout that could result in the future from the recent collapse of large banks, it is best to secure your business money now.

The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.