The banking crisis sparked by Silicon Valley Bank (SVB) in 2023 will continue yielding learnings for many years. Although it is only the most recent highly visible financial meltdown, it probably won’t be the last, and there are several best practices startups should employ to effectively weather this type of situation in the future. Moreover, a few proactive, off-the-radar strategies can provide even more protection and actually make a startup money on its spare cash.
It may seem obvious in hindsight, but two key lessons from SVB are banking diversification and proper treasury management. These aren’t just good ideas, they’re must-haves. Startups, even those without a CFO in place, should have at least one secondary bank account beyond the operating account, and preferably two. At the same time, higher interest rates afford opportunities in treasury management to earn a return on excess capital. Most startups either don’t pay attention to or even know about these strategies, as many of today’s founders are too young to remember when it was possible to earn an appreciable amount on idle cash.
It may seem obvious in hindsight, but two key lessons from SVB are banking diversification and proper treasury management.
Founders are rightfully concentrating on product development or go-to-market strategy. But it’s a mistake not to consider the larger picture and/or engage experts to assist. What happened last March, along with rising interest rates, are good reminders that there are prudent steps all founders can take today that safeguard their company’s capital. Founders can — and should — pursue a proactive approach to protecting their startup’s finances even while they concentrate on the immediate business of building their business.
Founders can — and should — pursue a proactive approach to protecting their startup’s finances even while they concentrate on the immediate business of building their business.
Banking diversification to cover all your needs
When it comes to diversifying your banking, it’s essential to select the right banking partners for your organization. Bankers are a foundational piece of your overall financial strategy; experts who are a good fit will offer service, support, and guidance tailored to your organization, enabling sound financial decisions. Work with a regional or niche bank for their service, targeted and/or local expertise, and work with a larger institution that’s “too big to fail.”
Making at least one of your two to three banks a larger one will help manage risk. Alternatively, find a bank that offers more insurance than the $250,000 FDIC provides. There are several banks, such as Bank of America, UBS, and Citizens that insure deposits at much higher levels. It’s also critical to select a bank that can scale as your startup grows. Your banking needs will evolve, sometimes very quickly, so the ideal banking partner should offer a range of products, including checking and savings, loans, bill pay, credit cards, and investments.
Additional questions to ask include:
- How available is the customer service team? Proven excellence is critical, so to determine a bank’s track record in this area, make sure to carefully research customer reviews and ratings.
- Where do you want your bank to be? Not all banks provide your most needed tools and services online. Also, not all banks offer in-person banking, physical deposits, or good branch coverage — think about how you want to bank.
- What are the rates of return AND fees? More on this regarding treasury management, but also look at interest rates for high-yield savings accounts. And make sure to compare fee structures.
Treasury management to make your money work for you
Global interest rates plummeted to nearly zero following the 2009 financial crisis, and until recently, remained there. This means an entire generation of new entrepreneurs have little if any awareness that it’s possible to make money simply by parking capital in the right place — by essentially doing nothing.
Yes, review a bank’s interest rates for savings accounts, and also, put your excess capital into opportunities such as money market funds or laddered CD portfolios. A laddered portfolio, for example, could generate significant income for your startup if set up correctly. With inflation starting to rise last year, experts generally believe we won’t likely see this ease up until late 2024 — if then.
A laddered portfolio, for example, could generate significant income for your startup if set up correctly.
Your treasury management strategy also must consider where the investments are kept. Direct ownership is possible through TreasuryDirect.gov, but there are several innovative new fintech platforms that help startups deploy and more easily monitor money. Whatever path you pursue, adopt a treasury management policy that is approved by your management team and board of directors.
Additional financial best practices
Again, there’s a lot to learn from a crisis. But while they serve as an excellent example of the potential impact for your startup, the guidance above and additional best practices that follow are always good ideas to minimize the risk of your startup being upended from problems in the banking system. Make sure to also consider:
- Managing your excess cash separately from your operational capital.
- Maintaining a 4-week or 13-week cash flow forecast that provides a good handle on immediate needs.
- Securing an emergency line of credit from your bank that would fund the company for 3–6 months in an emergency.
- Knowing what survival mode looks like and developing contingency plans around core staff and critical vendors.
- Discussing everything with your board to anticipate and be ready should a financial meltdown occur.
A crisis can certainly underline the importance of risk management, but there’s no good reason not to have partners, plans, and policies in place before something happens. And there’s every reason to protect your startup today.