What Is Bank Redundancy and How Can It Reduce Risk?

Kim Porter

Opening a business comes with a whole host of to-do items. One of the most important: Set up a business bank account to handle your company’s day-to-day finances. But if there’s a service interruption (or worse) at your bank, how will you keep operations running? 

If your business practices bank redundancy, you’ll have a plan B: Get funds from an account at another financial institution. Here’s what to know about setting up multiple bank accounts and how it can reduce your risk to exposure. 

What is bank redundancy?

Bank redundancy is a strategy in which a business owner keeps deposit accounts at multiple banks or credit unions. This can help cut down on risk. If there’s a problem at one bank—due to a cyber attack, system outage, or even bank failure (like in the recent case of Silicon Valley Bank)—it can cause liquidity issues. 

When your business can’t access its funds, it may be forced to delay payroll, cancel vendor checks, or default on loan payments. Forming relationships with different banks and credit unions allows you to pull cash from other accounts and meet your financial obligations if there’s a problem where you bank. It’s also pretty great to have the option of applying for loans and using small-business services at different financial institutions.

How to launch a multi-banking strategy

If you’re interested in setting up a multi-banking strategy, here are some basic steps to take:

Identify your needs

Start by figuring out which business-critical processes require you to pull money from your accounts. You can ask your accountant, bookkeeper, or tax adviser for suggestions.

Consider:

  • When does your business handle cash? Running payroll, paying contractors, purchasing supplies, and making loan payments all require you to have funds on hand. 
  • How much do you need to cover these financial obligations? Calculate how much you need each month and how much you want to stash in reserves. Put the funds in a bank account at a different financial institution, so you can weather any potential interruptions.
  • Where does my business keep deposits? You may already use a multi-banking strategy. But depending on the size of your business and the complexity of your needs, do you need to open more accounts?
  • Do you use third-party services to move money? If so, do they have fail safes for payment processing or use a redundant banking system? Also check whether the service offers extra benefits, like waiving wire fees. 

Research your bank or credit union

Your next step involves making a list of banks and credit unions to check out. You can ask your colleagues where they bank, or research financial institutions near you. 

Community banks and credit unions are typically locally owned and operated, and they focus on the needs of businesses and families in the area. Larger banks may offer less personalization, but they may have a wider array of services and products, plus more cash reserves to meet deposit needs. Once you have a few banks and credit unions in mind, take these steps to suss out their financial stability:

  • Look for deposit insurance: Any institution you do business with should have deposit insurance, which protects your money in the event of bank failure. (Yes, it happens occasionally. Here’s a list of bank failures since 2000.) The Federal Deposit Insurance Corp. (FDIC) offers this type of insurance for banks, while credit unions have similar insurance through the National Credit Union Administration (NCUA). And it applies to individual depositors as well as businesses. 
  • Consider the cap: Deposit insurance protects up to $250,000 per depositor, per institution, and per ownership category. If you have additional funds to deposit, consider moving them to another institution or putting them in an account that’s in a different ownership category.
  • Check ratings and reports. You can do this by pulling your bank or credit union’s financial reports, using services such as Weiss Ratings, or calculating your financial institution’s “Texas Ratio,” which is an unofficial measure of potential financial distress. 
  • Monitor for signs of distress. If you’re concerned about your bank or credit union’s financial safety, look for red flags. Your institution may be struggling if it closes branches, lays off staff, and significantly increases fees. These signs may signal your financial institution is facing difficulties and is attempting to conserve cash.

Should my company use a multi-banking strategy?

Depending on the size of your company and your business needs, you may consider using a multi-banking strategy. Banks and credit unions typically address crises immediately, but having your deposits tied up for hours or days could send your business into a tailspin. 

Bank redundancy—which can be as simple as accepting client paychecks at one bank and keeping cash reserves at another—may decrease the chance of cash flow interruption. You can set up a multi-banking strategy that’s either as complex or as simple as your business needs.

Kim Porter Kim Porter covers personal finance topics for AARP The Magazine, Bankrate, U.S. News & World Report, Reviewed, Credit Karma, and more. When she’s not writing, you can find her training for her next race, reading, or planning her next big trip. Twitter | LinkedIn
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