When the news broke about SVB, we spoke to many founders, and they asked similar questions about cash management, so we began pulling together some best practices.
1. Don’t put all eggs in one basket!
Diversification is the first step towards keeping your money safe and accessible at all times. Early-stage companies should have at least two or three bank relationships. Having a mix of accounts at different banks will minimize the potential impact of a bank run. While losing a third or half of your money is terrible, it isn’t as life-threatening as losing it all.
2. Keep your cash at systemically important banks
Look for a safe haven for your cash. Pick at least one bank with the status of being a “Global Systemically Important Bank” (G-SIBs). Those banks include JPM, Citi, HSBC, BNP Paribas, Deutsche Bank, ING, Société Générale, Crédit Agricole, etc. and they tend to be very broadly diversified. They are also required to maintain higher levels of capital and liquidity and undergo regular stress testing with the regulator. Should one of these banks struggle, governments are more likely to protect them.
3. Check insurance coverage applicable to your bank accounts
Deposit guarantee schemes protect customer deposits in case of a bank failure. In the US, the FDIC insures deposits up to $250,000 per depositor, per insured bank. Deposits in the UK are protected up to £85,000 per account. In Germany, the mandatory deposit insurance insures €100,000 per account, but most banks offer an additional, voluntary deposit protection scheme.
4. Review the rating of your bank
A credit rating of Moody's, Fitch and S&P is a quick and easy way to check the financial health of a bank before you open an account. It's an independent resource to assist you in making banking decisions. Pick a bank with a minimum investment grade rating level, i.e. Aaa/AAA, Aa1/AA+, Aa2/AA, Aa3/AA-, A1/A+, A2/A, A3/A-.
5. Pick banks that can serve you well
Aside from security (which should always come first!), you should consider aspects such as the quality of services of a bank and their understanding of your business. Pick one or more banks that are aligned with your size. International banks often have large minimum deposit requirements. SVB regularly asked clients to deposit all their cash with them. It’s smarter to diversify your cash across a minimum of two banks rather than pooling cash at one bank to achieve minimum account requirements.
6. Balance security and customer experience
Some banks have much better tech than others. Unfortunately, the largest and most established banks frequently don’t offer the most seamless experience, and you may prefer a regional bank or a neobank for your day-to-day bill payments, credit cards, and payroll. In this case, we suggest opening a business account with a Fintech company and using that for all your day-to-day banking activities. Keep most of your cash at the large bank and wire money to your operating account once you run low on your account balance.
→ Why Fintechs are more secure than you think
7. Use technology to streamline finance processes
Use a multi-banking solution to maintain a holistic overview of your financial accounts. It’s critical to be able to have the tools on hand to easily analyse and report on cash. Modern multi-banking solutions like Friday Finance integrate with your entire financial stack and help you automate manual finance processes.
8. Allocate cash responsibly between banks
We recommend keeping a maximum of 30-50% of funds at one institution to spread risk across 2-3 banks roughly equally. This should ensure that even in the worst-case scenario of a bank failure the company would have access to sufficient funds to operate normally in the short term.
We recommend holding >80% of your cash at one or more of the systemically relevant banks. There’s no guarantee they won’t fail, but they’re safer than smaller banks. For an extra level of protection, it is advisable to pick two or more systemically important banks from at least two countries with economic and political stability.
9. Protect yourself from operational risks
SVB reminds us that the risk of a bank run is real. But there are many other reasons to operate more than one bank account. Cyber attacks, website outages, losing access to your 2FA device, or getting blocked by your bank from making transactions because of AML checks can all restrict your ability to make payments. Having a backup bank helps mitigate a lot of operational risks.
10. Implement approval processes and security protection
Phishing attacks are a real risk. Keep in mind that having multiple banking relationships may increase the risk of you falling for phishing attacks. Make sure to have some essential cyber security protection and limit the number of authorised users on your bank accounts. All bank accounts shall be reconciled on a monthly basis, and any discrepancies shall be resolved in a timely manner (ideally within the regular month-end closing process).
And just to highlight once more that this is serious:
- Small and mid-size businesses lose an average of $1.6 million recovering from a phishing attack.
- According to Cofense’s 2017 Phishing Resiliency Report, mid-sized companies lose an average of $1.6 million every time a fraudster successfully targets them.
- Nearly half of phishing attacks are of the credential-harvesting type and 41% look for sensitive information and payment data.
- 90% of all security breaches are due to human error.
11. Manage your FX risk
If you have expenses in multiple currencies, make sure you can meet your expected commitments by holding cash in these currencies. You don’t need a complicated hedging strategy. Just aim to keep different currencies based on your expected net cash outflows to avoid FX swings that can shorten your runway.
12. Optimize for yield, but don’t sacrifice flexibility
If you’re a Series B or later company with tens of millions in cash, investing excess cash into fixed-term deposits or money-market funds can offer attractive additional yield, however, keep in mind that it will render the cash inaccessible during the given maturity. We recommend utilizing such products only when you have a really strong forecast and a lot of extra cash.
13. Ask questions in risk management
Financial risk management for startups is as simple as asking “what if” questions about your business: “what happens if I lose access to my primary bank?”, “what happens if our payment processor goes down?”, and so on. Make sure to ask critical questions and protect yourself against foreseeable risks.
14. Develop a treasury policy and let your board sign off on it
Create an official document that formally sets out current treasury activities and establishes a treasury risk management environment in which all objectives, policies, and operating parameters are clearly defined. A Treasury Policy often considers inevitable financial risks and covers all the different activities you may undertake. It explicitly states where excess cash is invested and what investment decisions need Board approval. An example of a treasury management policy can be found here. Have the Board approve the policy to get alignment on risk tolerance and investment preferences.
15. Conduct regular reviews of your finance setup
All investments shall be reviewed on a regular basis (at least quarterly) to ensure they continue to meet the company’s investment objectives and risk tolerance. Ratings of major banks shall be reviewed regularly to ensure financial stability of these institutions