The dust is still settling on the banking crisis sparked by Silicon Valley Bank March 10-13, but it’s not too early for founders to draw some very important lessons from it. Importantly, you can protect your startup from the impacts of the next SVB-like crisis by taking these steps:
- Have at least one secondary bank account, preferably two: It seems obvious in hindsight that having only one bank for your startup is not a good idea, but many CEOs suddenly realized on Thursday that they’d put all their eggs in one basket. Have at least two deposit institutions set up at all times, synched with your Quickbooks account.
- Manage your excess cash separately from your operational capital: Bank with a smaller, regional, or niche institution for their expertise or service for all your daily money in/money out needs if you’d like, but utilize a larger, systemically important bank that would be considered by regulators to be too big to fail for any cash you won’t be needing for a while, i.e. anything more than 8-12 months of operating capital.
- Develop and implement a treasury policy, or a statement of what you’re going to do with excess cash on your balance sheet: In this policy, describe how, when and with whom you’ll deploy it into instruments other than a basic checking account with only $250K of insurance. This not only generates yield on your excess capital, which is always a good move, but diversifies institutional risk. Everything from money market funds to laddered CD portfolios that get significant amounts of capital under FDIC insurance are options – know the difference between them and how they work to protect your capital.
- Diversify your excess cash: Keeping multiple years of runway in a single uninsured checking account, no matter how remote you think failure of your bank might be, is never prudent.
- Read #4 again.
- Have and maintain a 4-week or 13-week cash flow forecast: Many startups realized last week that they didn’t have a good handle on immediate cash needs. A crisis is not the time to develop information and awareness around cash flow – have your finance team keep a rolling forecast of what bills are going to be due to whom and by when, plus what invoices you expect to receive, so you can – at a glance – see how cash balances develop. From there, you can quickly make decisions about how much liquidity will be needed to fund the business for several weeks.
- Have an emergency line of credit: If possible, obtain a line of credit from one of your banks that would fund the company for 3-6 months, and keep it 100% untapped for emergencies.
- Have a good sense of what survival mode looks like for your business and develop contingency plans around it: Identify core staff, mission-critical vendors, etc. whose absence would threaten the company’s ability to navigate a crisis, and get a sense of which payables could be deferred if push came to shove.
- Discuss with your board: Events can move faster than your ability to react to exogenous events within the financial system. These events can have major impacts across the ecosystem, so discuss with your board, your team and your investors what your company can put in place now to insulate itself should circumstances require.
Events like the SVB crisis can instantly fracture the status quo in the banking sector. This certainly happened with the global financial crisis of 2009, and has likely occurred again over the past week. However, risk mitigation is best crafted BEFORE a crisis starts to unfold – taking a few (or all) of the steps above will go a long way to protecting your startup from the impacts of the next SVB-like crisis.