2023 Bank Collapses: What Small Business Owners Must Know About Lending in 2025

Overview of 2023 Bank Collapses and Their Causes

When U.S. banks like Silicon Valley Bank and Signature Bank failed in 2023, the shock rippled far beyond Wall Street. For many small businesses, it became instantly tougher to find money to grow or simply keep moving. Banks tightened their lending standards, and credit dried up fast. Since then, getting approved for a loan has become more complicated and often more expensive.

This post breaks down how that wild year upended small business lending. You’ll learn what’s changed, who’s feeling the squeeze, and what business owners can do about it.

Overview of the 2023 Bank Collapses

The year 2023 delivered a storm that no one saw coming in banking. Two high-profile failures set off panic, and the aftershocks were felt by nearly every business that relies on steady access to loans. Let's break down what happened, why it happened, and how it forced everyone to pay closer attention to risk.

Major Bank Failures: Case Studies

Photo by Tima Miroshnichenko

The collapse of two large regional banks triggered a domino effect across the financial system. Here’s what stood out about these cases:

• Silicon Valley Bank (SVB): Based in California, SVB was the 16th largest bank in the U.S. by assets. It mainly served startups, venture-backed firms, and tech companies. In March 2023, a wave of deposit withdrawals led to a bank run. SVB’s rapid downfall became the third-largest bank failure in U.S. history and sent shockwaves through the tech industry.

• Signature Bank: Located in New York, Signature had a heavy focus on commercial real estate and digital assets. It was the third-largest bank failure ever at the time, happening just days after SVB’s collapse. Signature Bank’s closure rattled the broader financial community, especially with its ties to businesses holding large uninsured deposits.

The impact? Both banks specialized in working with clients who often kept balances above the standard insurance limit, which made these collapses especially disruptive. Panic spread quickly, leading other banks to tighten their standards almost overnight. Long-standing banking relationships came into question, and thousands of firms had to redirect their finances in a hurry.

Root Causes and Regulatory Response

Why did it happen? Several factors worked together, setting up exactly the kind of perfect storm that keeps bankers up at night.

Key causes included:

• Rising interest rates: These banks had invested heavily in long-term bonds, which lost value as rates increased. When too many clients started pulling out money, they were forced to sell these bonds at a loss. Many observers blame poor risk planning for not preparing for this scenario.

• Banking mismanagement: Senior leadership in both banks failed to respond quickly to warning signs. They didn’t hedge their risks or keep enough liquidity to handle a sudden run.

• High concentration of uninsured deposits: Both banks catered to clients with balances well over the $250,000 FDIC insurance cap, making their customer base quick to panic and withdraw at the first sign of trouble.

When the dust settled, regulators had to take swift action to protect the wider system. The Federal Deposit Insurance Corporation (FDIC) stepped in to guarantee all deposits, not just insured amounts, for both SVB and Signature. This was an extraordinary move meant to stop the panic from spreading.

Agencies like the Federal Reserve and FDIC announced emergency lending options for banks in need of short-term liquidity. Regulators kicked off investigations and began pushing for tighter oversight of interest rate risk and capital requirements. Many question whether enough has changed since, but it’s clear these failures forced a fresh look at risk controls across the industry.

Banks of all sizes had to update their playbooks, putting stricter limits in place and examining which clients carried outsized risk. The ripple effects were immediate and are still being felt, especially by those who depend on flexible, accessible loans for daily operations.

The Immediate Impact on Small Business Lending

The failures of Silicon Valley Bank and Signature Bank in 2023 caused banks nationwide to hit the brakes on small business lending. Banks scrambled to protect themselves from sudden withdrawals and began to treat every new loan as a bigger risk. Small business owners suddenly found it harder than ever to get the funding they needed, even those with solid histories and strong cash flows. The shock of these collapses pushed banks to put new rules in place almost overnight, and small businesses were the first to feel the squeeze.

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Tightened Lending Standards and Criteria

After the high-profile bank failures, lenders quickly got a lot more careful. Most banks started demanding higher credit scores, more documentation, and stronger business plans just to consider a loan application. Even profitable businesses with clean books found themselves running into new red tape.

Key ways lenders tightened standards include:

• Higher credit thresholds: A good credit score isn’t just helpful now, it's nearly required.

• Increased paperwork: Banks may need multi-year financials, proof of cash reserves, and sometimes even personal guarantees from owners.

• Focus on collateral: Many lenders now want assets pledged in case a loan goes bad.

• More conservative loan-to-value ratios: Businesses can borrow less against their property or inventory than before.

These new, tougher requirements led directly to fewer approvals. According to recent data, approval rates for small business loans dropped in 2023 and stayed low into 2024, with reports noting a significant decline in lending activity.

Banks shifted into risk aversion mode, often choosing to avoid making loans except to their lowest-risk customers. Many smaller businesses simply didn’t make the cut, especially startups or those in industries seen as “risky,” like restaurants or retail.

It wasn’t just new borrowers feeling the pain. Many business owners who used to breeze through renewal reviews suddenly faced new questions, higher interest rates, or outright rejection. Banks focused on their own survival, shrinking their credit supply and putting the brakes on new lending almost across the board. The result: even established businesses struggled to get funds needed to cover inventory, payroll, or planned expansion.

Shifts in Loan Types and Loan Sizes

As standards tightened, the kind of loans banks offered also changed. Before 2023, businesses could often secure long-term, fixed-rate loans with predictable payments. After the collapses, that option faded for many small businesses.

Noticeable trends included:

• Preference for short-term loans: Banks leaned toward loans with shorter payback periods. These reduce the bank’s risk but can strain a business’s cash flow.

• Rise of variable-rate loans: With economic uncertainty, more lenders pushed adjustable rates, passing some risk back onto borrowers.

• Decline in average loan size: Businesses looking for large injections of cash found themselves limited. The Federal Reserve and other sources reported a decline in average small business loan amounts post-crisis.

• Shift to alternative financing: With banks pulling back, more business owners turned to online lenders, merchant cash advances, and credit cards, often at much higher costs.

Consider the analogy of a shrinking blanket. After these collapses, banks pulled back their blanket of credit, leaving only their safest, best-known customers covered. Everyone else was left to find another way to stay warm.

This change in loan products and sizes means many small businesses operate with less financial cushion and fewer funding options. For some, this means slowing growth or skipping needed upgrades. For others, it’s a scramble to plug cash flow gaps using whatever funding sources they can find—even when those options come at a steep price.

As banks continue to put safety first, the comfort and predictability that used to define small business lending is hard to find. Some reports highlight the ongoing struggle for business owners seeking financing even a year after the bank failures. The changes that happened overnight now look to be the new normal for many.

Long-Term Effects on Small Business Financing Options

After the chaos of 2023, small business owners didn’t just face short-term hurdles—they’ve had to rethink their financing strategies for the long haul. The sudden shift in the lending world, triggered by the bank failures, led to new players stepping up, old relationships being reexamined, and the entire funding process being reimagined. Let’s break down what these changes really look like for Main Street businesses today.

The Rise of Fintech and Non-Bank Lenders

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With banks tightening the purse strings, fintech companies and non-bank lenders wasted no time filling the gap. These lenders use technology to make lending faster, often approving loans in hours, not weeks. They tap into new data sources to assess credit risk, welcoming businesses that banks might pass over.

Here’s how fintech and online lenders changed the game for small business borrowers:

• Easy application processes: Many owners appreciate borrowing platforms that skip the piles of paperwork.

• Broader approval criteria: Even businesses with lower credit scores or limited history now have a real shot at funding.

• Faster access to funds: When payroll or an inventory purchase can't wait, quick access makes a huge difference.

• Flexible loan products: Options include merchant cash advances, short-term loans, and lines of credit tailored to business cycles.

But there are also risks. Borrowers may find:

• Higher interest rates: Convenience often carries a price. Some fintech loans come with interest rates much higher than local banks ever charged.

• Less regulation: Not all lenders play by the same rules, so borrowers need to watch for hidden fees and predatory terms.

• Shorter repayment periods: Many non-bank loans require money back within a few months, putting pressure on cash flow.

If you’re interested in how fintech surged to fill lending gaps, check out this overview on the evolution of small business lending, or see data on how fintech lenders expanded lending post-crisis.

Changes in Bank-Small Business Relationships

The shocks of 2023 forced many business owners to rethink their relationships with traditional banks. Trust, once taken for granted, had to be rebuilt. National banks, hit the hardest by the crisis, often focused on their largest clients and became even tougher on small business borrowers.

Community banks and local credit unions, in many cases, picked up the slack. They often stepped in where bigger banks pulled back, offering more personalized service and taking time to understand each business. What changed for borrowers?

• More focus on relationships: Owners discovered the value of strong ties with bank representatives who know their business by name.

• Greater local bank appeal: Community lenders offered flexible terms and were willing to work through unique business challenges.

• Increased transparency demands: Small businesses demanded clear information about bank health and loan terms before committing.

Recent surveys show small business owners value connection and flexibility. National data suggests preferences have shifted toward lenders who offer tailored advice, local involvement, and faster responses, all of which community banks are well-positioned to provide. Need more insight? This article on banks focusing on small business relationships dives deeper.

For more numbers and stories from small companies, the most recent Small Business Credit Survey gives a snapshot of how these relationships are changing.

Strategic Shifts in Small Business Borrowing

After 2023, small businesses didn’t just seek new lenders—they overhauled their entire approach to finding and using capital. With the future less predictable, strategies became more conservative and creative at the same time.

Common shifts include:

• Diversifying capital sources: Owners began splitting borrowing across banks, credit unions, online lenders, and even private investors to avoid being cut off by a single lender.

• Prioritizing cash flow management: Keeping cash on hand and improving collections suddenly mattered more than chasing aggressive growth.

• Delaying big projects: Many shelved expansion, renovations, or hiring until markets felt more stable.

• Exploring SBA loans and government support: Programs backed by the Small Business Administration became a lifeline, seen as safer and easier to access during uncertain times.

This shift toward careful, planned borrowing strategies is expected to last. Small businesses have learned to keep backup funding sources ready and focus on stability over rapid expansion. The U.S. Chamber of Commerce highlights these trends among business owners reacting to a more cautious lending environment.

For those exploring the latest in funding strategies and government-backed options, the Treasury Department's recent report provides an in-depth look at today’s financing landscape.

By adopting flexible, cautious strategies and keeping a watchful eye on multiple funding sources, small business owners are writing a new rulebook for surviving—and thriving—when the old rules no longer apply.

Policy Changes, Regulatory Outlook, and the Future of Small Business Lending

Since the dramatic bank failures in 2023, watchdogs and lawmakers have rushed to strengthen the rules that guide regional banks and business lending. As new safeguards are proposed and debated, both small businesses and their lenders face more hurdles and a playing field that looks different from even a year ago. Here’s what’s on the table and what it might mean for small companies seeking loans.

Anticipated Regulatory Reforms

The failures of Silicon Valley Bank and Signature Bank acted as a wake-up call, revealing cracks in old rules. In 2024 and into 2025, regulators and lawmakers have discussed or launched several major changes:

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• Tougher Liquidity Rules for Regional Banks
  Regional banks are being asked to hold more liquid assets, like cash and U.S. Treasuries. This is meant to make them less likely to collapse if customers pull out large sums. New guidance urges banks to plan for sudden outflows and keep “rainy day” buffers.

• Periodic and More Robust Stress Tests
  Regulators are pushing for closer checks on banks, not just the giants. Stress tests now look at how a bank could survive under stressful economic scenarios, like sudden rate hikes or mass withdrawals. The hope is to catch problems early instead of relying on past performance. The FDIC has published new survey data and insights reflecting increased attention on loan practices at these institutions.

• Data Collection and Fair Lending Rules
  The Consumer Financial Protection Bureau (CFPB) issued new rules that require lenders to collect and report more data on who gets small business loans and why. This is designed to bring transparency and avoid discrimination, helping ensure all types of business owners get a fair shot. The CFPB’s small business lending rulemaking explains these new requirements stemming from section 1071 of Dodd-Frank.

• Delay and Revision of Controversial Policies
  Some policies rolled out after the collapses have already been amended or delayed. The FDIC recently pulled back or paused certain bank proposals in response to bank pushback, favoring a steadier adoption pace. As policymakers debate how strict lending and capital rules should be, the outcome is still being shaped.

• Stricter Oversight on Risk Management
  After reviewing the causes of the 2023 failures, regulators now require banks to prove they can spot trouble before it starts—tweaking everything from deposit insurance limits to risk reporting methods. Learn more from the GAO’s roadmap for improving bank oversight.

• Compliance Date Extensions
  Some reforms have generous deadlines for compliance. According to the Federal Register, extensions are in place to help banks make major changes without upending ongoing services for borrowers.

Small businesses will likely see loan applications take longer, with lenders collecting more information to meet federal expectations. The upside: more safeguards for your deposits and a fairer lending process. The challenge: extra steps and paperwork, which may slow things down a bit.

Predictions for Small Business Lending Market

Borrowing for small businesses has always had ups and downs, but the swings have grown sharper since 2023. What should business owners expect as reforms are rolled out and banks adjust?

• Continued Cautious Lending
  Many banks plan to keep tight control on loans, at least through the next few years. Even with new rules in place, the memory of recent failures keeps loan officers cautious. A 2024 survey by the Kansas City Fed found that while demand for business loans rose, actual approval rates stayed lower than before the crisis.

• Soaring Role for Alternative Lenders
  As bank credit remains tough to get, more business owners turn to fintech companies, peer lenders, and online platforms for funding. These lenders are expected to grow their market share, though often at higher interest rates compared to banks. Analysis from Moody’s confirms this trend will shape the market for years to come.

• More Focus on Flexibility and Personalization
  Borrowers can expect more loan products tailored to short-term needs or unpredictable markets. Lenders now favor adjustable paths—offering shorter repayment terms, revolving lines of credit, and tighter eligibility rules. Data from Credit Suite shows more applicants are turning to credit lines and SBA-backed loans as a safer bet.

• Advancements in Data Analytics and Automation
  The future will bring even more tools for lenders to assess creditworthiness, including AI-powered platforms that scan everything from payment histories to social signals. This might speed up some parts of the lending process but could leave businesses feeling scrutinized.

• Potential for Further Rule Tweaks
  The dust hasn’t fully settled. Lawmakers are weighing tweaks to make the financial system even more shock-proof. Expect periodic rule reviews and, possibly, stricter requirements. The FDIC’s recent speech on lessons learned post-failures outlines how ideas are still in motion.

Business owners who understand these changes will be the most ready to adapt, whether by updating their record-keeping, building new bank relationships, or seeking creative funding sources. The lending market is not what it was in early 2023—adaptability and awareness will be the keys to thriving in the new era.

Conclusion

The 2023 bank collapses reset the rules for small business lending. Banks became strict, fintech and online lenders gained ground, and owners faced more paperwork, higher rates, and tighter limits. Long-term, small businesses moved from putting all their trust in one lender to building a network of options and planning for surprises.

Business owners now get ahead by tracking cash flow, comparing lenders, and staying ready with backup plans. Keeping an eye on new rules and talking often with your bank or finance partners matters more than ever.

Thanks for reading. Share your own lending experiences or tips in the comments—help others learn and stay prepared for what comes next.