Most of the owners we talk to at Delancey Street are worried about the lenders and funders who want to be paid. Far fewer stop to ask what happens if the lender itself goes under, until it does. When Silicon Valley Bank was closed in March 2023, plenty of businesses found out overnight that the bank holding their loans, credit lines and operating cash was gone. If that happens to you, the answer could affect your cash flow, and even your ability to stay open. The truth is that the debt remains, even though the bank that you owe it to is no longer.
The FDIC Is in Control
Your banker isn’t your banker any more. The FDIC is in control. The FDIC steps in and becomes the receiver; effectively, they take over the failed bank’s operations. Everything the bank owned and owed passes to the receivership. The bank’s employees have no power over the bank or you anymore. The FDIC has a lot of power. Federal law gives it broad discretion to operate, sell, merge or liquidate what is left, with few deadlines attached. How long will this go on? You don’t know. Several years? Less? More? Receiverships have historically lasted from several months to more than ten years.
If your lender fails, the loan isn’t wiped out. A failing bank does not simply walk away from its loans, and you are not automatically relieved of your obligation to repay the debt. After Silicon Valley Bank failed, the FDIC told its borrowers exactly that: keep repaying your loans. Who pays the debt? You do. You should know who your creditor (or creditors) are, and avoid delaying or refusing repayment on a loan in the mistaken belief that the lender is no longer a real party in interest. That is a really bad idea.
The catch is that the obligation does not necessarily run both ways. The FDIC can repudiate, or walk away from, the failed bank’s contracts, loan agreements included, just like you or I could reject an executory contract in bankruptcy. You’re not left with much to show for it - just a claim against the failed bank’s estate. With Silicon Valley Bank, lines of credit with undrawn commitments stopped working as usual. The FDIC told borrowers with credit lines, construction loans and other loans with unfunded commitments that it was not required to make further advances, but would consider them case by case. That is great for the FDIC, but if you relied on continued funding to carry out the project or support your business, it could put you in a very tough situation.
But it’s got to act within a reasonable time. And it’s got to decide that the contract is burdensome and that repudiating it will promote the orderly administration of the bank’s affairs. Those are all discretionary things - so it’s anybody’s guess when it would walk away from you. And it may or may not repudiate your loan agreement. But you still have to make your payments.
So you may need to try to work out an arrangement with the FDIC. Remember that the FDIC is the receiver now, and it will look at your request for a loan on a case-by-case basis, and it might try to renegotiate the terms of your loan. The FDIC might give you an advance of funds if it’s an emergency, and you need it for collateral value, to stay in business or for safety reasons. It has said it will do that only in very limited circumstances. Be prepared to make your paperwork more complete than what the failed bank required, and give it as quickly as possible.
Your Deposits with the Failed Bank
There may be some relief if you kept your operating account at the same bank. If you had both the loan and the deposit at the same institution, you may have the right to set off the amount of your deposits against the amount of your indebtedness to the bank, under certain circumstances, up to the lesser of the two. This can happen even if the borrower is not delinquent under the loan. Loan agreements often restrict or even waive the borrower’s right to setoff. Check yours. And your deposits with the failed bank need to be in the same legal entity as the loan was made to, and the lender has to be the bank itself. Claims against a sister or affiliate bank may not be setoff.
Deposits are insured by the FDIC, but only up to $250,000. Your account balances are aggregated; you can’t get more FDIC protection by splitting your deposits among multiple accounts. The first $250,000 in deposits is safe but the balances above the $250,000 are uninsured and are treated as general, unsecured creditor claims against the failed bank. This means the FDIC will probably only give you a “receivership certificate” for any uninsured amount. Generally you can’t guess how much you’ll get back on one of those certificates, or when.
Replacement Cash
All of this lands on your cash. Don’t know when you can get to your money in the failed bank? You can’t be sure. And if you ask the receiver for an advance, it might not fund your request on time, or it might never do so at all. How much cash do you need, and when do you need it? At least 13 weeks out, plus any bigger bills coming up in the future. Get this map right first, because your next decisions depend on it. See how much time you have before you need replacement cash.
It is a good idea to start opening accounts and getting credit at one or more other banks. Maybe use several banks. It’s tempting to put payroll on hold while you solve other problems. Don’t. All employees’ wages and salaries are protected by state and federal law and paying them should be an extremely high priority. Let your employees know what you’re doing to keep payroll going.
Also consider getting emergency bridge funding from current investors or new sources of funding. Be careful to account for how new funding will interact with existing loans. For owners already carrying other debt, that point matters a great deal. And before you rush to replace the failed bank, consider this. If the failed bank’s assets are acquired by a new financial institution, the new entity may be more willing to preserve the loan agreements than if you have to find a completely new bank.
If your business has been badly hurt - temporarily or long-term - call your trusted advisors right away. In a crisis, your time is short, not infinite. You have to act before you are blindsided. Delancey Street is a business debt settlement company, not a law firm. We talk with your funders and lenders to get a deal for less than what you owe. We don’t sell another loan. If lawsuits or bankruptcy make sense, we refer you to an independent attorney. We provide a free, confidential first consultation. If there’s a cheaper path, we’ll tell you on the first call.
