While there are certainly many nuances to banking that are not cut and dried, at its core, banks serve as intermediaries between depositors and borrowers. Depositors are paid interest based on the amount of money they bank, and borrowers are charged interest—at a higher rate than depositors are paid—on the amount of money they are loaned. The difference between those two interest rates is how banks make money.
The well-publicized failure of Silicon Valley Bank sent shockwaves through the banking community, and shortly after its collapse came the failures of Signature Bank in New York and First Republic Bank in San Francisco. All those events illuminated how important it is for banks to have enough cash deposits and reserves available to cover depositors’ withdrawals—and it’s led to a push by banks to want deposits over loans.
In the second quarter of 2022, deposits at FDIC-insured banks fell $370 billion, the first quarterly drop in four years. And that trend has continued, with a report from Fitch citing depositors seeking higher-yielding alternatives and the Fed continuing to shrink its balance sheet as culprits.
What are the banks doing to combat this? Some require deposits from business owners as a necessity for securing loans. That certainly seems to be an appropriate strategy since:
- Deposit declines directly affect banks’ lending ability.
- Liquidity challenges occur when banks experience elevated loan growth along with deposit decline.
What does this mean for business owners? It has the potential to put them between a rock and a hard place—since banks increasingly want them to make a long-term commitment in the form of making deposits before they will consider approving loans. This, despite the fact that banks rely on a fractional reserve banking system whereby they can lend more than the actual deposits on hand. The bottom line, as it often is, is profitability.
Fortunately, business owners have alternative lending methods they can turn to if they’re not willing to adhere to deposit requirements to secure a bank loan. Alternative lending partners like Clear Skies Capital do not require deposits to be approved for loans. In addition, they provide greater flexibility regarding certain loan requirements and a simpler and quicker lending process.
Clear Skies Capital has helped many business owners determine the loan option that’s best for them. Contact us today at 800-230-9822 to discuss your specific needs.