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The bankruptcy of Silicon Valley Bank caused a lot of stress for many startup founders. Although US financial regulators intervened and took charge of customer deposits, the incident showed that financial markets remain volatile.
Amid the banking panic, Signature Bank has faced bankruptcy, while Credit Suisse is being acquired by its competitor UBS; Customers of First Republic Bank have recently withdrawn more than $100 billion.
To avoid getting swept up in a bank run like this, startups should focus on getting better at cash management and fostering stronger relationships with banks. VCs are going to pay more and more attention when deciding whether to invest in a startup.
Here are four tips startups can use to reduce their financial risk.
Tip # 1 – Put money in several banks
When the economy is unstable, the likelihood of bank failures increases due to factors such as higher interest rates, increased risk of loan defaults, investment losses, large customer withdrawals, and stricter regulations by the government.
But even in stable economic conditions, banks may decide to freeze or close accounts for security or other reasons. Hence relying on a single bank account is never a safe option.
Businesses should distribute their funds among two to four non-affiliated banks, preferably in different countries, closely monitoring the activity of each account. I recommend having enough cash in two checking accounts each to cover 2-3 months of expenses and a third account to invest any surplus cash in safe and liquid assets.
Those who find it challenging to manage more than three accounts should have at least two. One account can be designated for routine business operations such as payroll and supplier payments, while the other can be used to hold remaining funds.
For startups with a balance sheet of more than $3 million, it is advised to open a savings account with a reputed and stable A-level bank such as JP Morgan Chase & Co. or Bank of America in the United States, Deutsche Bank or Crédit Agricole in Europe She goes.
Consider purchasing Treasury bills (or T-bills), U.S. government bonds issued in U.S. dollars with maturities ranging from one month to one year, which also have annual yields of up to 5%. If a bank bails out, T-bills will not be affected by the bank’s financial condition because they are kept independent of the bank’s finances.
A smart idea would be to create an investment plan that prioritizes capital preservation rather than purely profit pursuit. Never keep your VC’s money in cryptocurrency – it’s too risky.
Connected: What is Cash Management Account?
Tip #2 – Research the Country, Not Just the Bank
When you choose a bank for your startup, don’t just look at how safe it is. Think about other factors that could make it stable or unstable in a particular country, especially if there were times when banks were closed there.
To find the bank in the right location, learn about the local rules and regulations governing banks there. Evaluate the economic and political environment, including the rate of inflation, the amount of interest banks charge, and the stability of the currency and banks in that location.
Related: Choosing a Bank for Your Startup: Here Are Some Things to Consider
Tip #3 – Know about deposit insurance provided by regulators, institutions
Different countries have their own regulators that manage their financial systems. For example, the United States has the Federal Deposit Insurance Corporation, and the United Kingdom has the Financial Services Compensation Scheme.
These regulators aim to protect bank deposits to a certain extent by providing insurance in case of bank failure.
America FDIC insurance typically covers up to $250,000 per depositor per bank for individuals and businesses. However, some financial companies may offer additional deposit insurance options.
In the wake of SVB’s collapse, US-based financial platform Brex raised its FDIC insurance limit for companies to $2.25 million. Meanwhile, Neobank Mercury has increased deposit insurance for its customers to $3 million.
Other ways to increase deposit insurance coverage include using certificates of deposit accounts (CDARS), credit unions, or the MaxSafe program, which can increase FDIC insurance up to $3.75 million.
the UK UK-based startups can get up to £85,000 of deposit insurance coverage per depositor per bank through the Financial Services Compensation Scheme (FSCS).
Private banks and building societies (a type of financial institution) offer deposit insurance above the FSCS limit by joining the FSCS Temporary High Balance Scheme (THBS). It can provide additional protection for deposits of up to £1 million for up to six months.
Europe. In the European Union (EU), all member states must have a Deposit Guarantee Scheme (DGS) to protect customers in the event of bank failure. The DGS usually provides coverage of up to €100,000 per depositor per bank. However, non-EU banks cannot offer deposit insurance for companies.
Some European countries – both EU and non-EU – have supplementary insurance opportunities beyond DGS. In Norway, deposits of up to 2 million kroner per bank per depositor are protected by Bankenes Sikringsfond. In Germany, many private banks are part of the Association of German Banks, which provides insurance coverage for deposits of up to €50 million.
Due to the long process of opening an account at an A-level bank (6-18 months), many startups prefer e-money institutions like Wise, Stripe or PayPal instead. In this case, the account opening process is faster (a few weeks) and provides a more seamless customer experience. But financial regulators usually don’t protect the money kept there.
Connected: Collapsed Silicon Valley bank has found a buyer
Tip # 4 – Warm the banks up to you
By developing a rapport with your bank, you can benefit from more personalized updates on the status of your accounts and investments. One way to strengthen this relationship is to create an investment account and buy shares or debt obligations through a bank.
To establish a friendly relationship with banks, consider entrusting the management of your funds to them. High Net Worth Individuals (HNWIs), who have investable assets of at least $1 million, are the main source of profit for banks through their wealth management services. In CEE, the standard commission for investment management services is around 1-1.5% on average.
In my experience as an investor, startups that adopt smart cash management strategies have an edge over their competitors when trying to raise funds.
Make a plan for how much money you will have/need for the coming month; Check and update it every day. Keep track of when you have bills to pay and when you expect to receive the money. ensure the process of approving money transfers to avoid fraud; Try using the “Four Eyes Principle”.
If you anticipate any financial difficulty, notify your executive team and board, and reserve a credit line with one of your major banks to support the company’s operations for at least six months (but not use Do it only when necessary).
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