The federal government has done the right thing to protect jobs—a major segment of our economy—and the banking system in general by backstopping 100% of depositors’ money in SVB. Now we will all have more measured time to think clearly, dot the i’s and cross the t’s, and harden our financial futures.
Here are the top five questions I’ve been getting and the answers I’ve been giving, which, I hope, will help all founders and finance leaders.
1. Where should I keep company money, and how many bank accounts do we need?
Where we will likely net out is companies having three banking relationships, so to speak.
- Two larger banks—J.P. Morgan, Bank of America, etc. Keep at least three months of operating capital available as your main account. Have a backup account with $250K in that account, and sweep the rest (see question #2 for what this means).
- One smaller bank—You can choose a regional bank or you can choose a more “online first” bank. This is helpful to have so you have an option that is just more responsive and nimble than the big banks are able to be when you need to move money faster. Keep at least $250K in cash in this third account. Or if they have a way to offer high insurance minimums, as some digital-first banks have done recently, you can hold more there.
Just understand that some of the digital-first banks that have been upping their FDIC insurance are really backed by partner banks, and the risk is on par with whatever the risk of their partner banks is. It’s more diversified because they have more partners, but it’s still there.
The key is to have diversification. That’s the main lesson of this fallout.
The other, very important tactical piece is to ensure that you set up default wire templates that allow you to easily wire money between all your accounts. It can take several days to set those up, so if you need to move money quickly, you don’t want to have a delay because the wire templates aren’t set up.
2. What is a sweep account, and what’s important to look for when setting one up?
A sweep account is typically a type of investment account that is linked to a checking account. The idea behind a sweep account is that any excess funds in the checking account are automatically “swept” into the investment account on a daily basis, where they can earn a higher rate of interest than they would in a traditional checking account. At the same time, funds can be easily transferred back to the checking account as needed to cover expenses.
You will need a sweep account associated with each of your bank accounts and will need the sweep account to be associated with a trusted third-party financial institution.
When you set up the sweep accounts, your bank will ask you where you want the sweep account to go. Keep it with that bank. Or would you like it to go to a trusted third party? The difference is if you keep it with the bank, it is considered a customer deposit. So even if the interest rate is higher, you should choose the third-party option.
3. Do I need a treasury management strategy?
When you think about a treasury strategy, it's really about where you park your money over what timeframe so you can cover your operational expenses. So, if you are taking care of #1 and #2 above that is the beginning of a treasury management strategy. As a finance leader, you will say how much you will need to have available in your account at any one time to cover short-term needs.
At or around Series D, it might be time to get more sophisticated—but that’s a separate blog post.
4. What else do I need to be thinking about?
- Phishing attempts—The entire industry now has dozens of emails floating about with vendors asking to make “Banking Account #” changes. Double-check and triple-check the sources. Everyone should verbally confirm with the vendor(s) that this was their true request. Unfortunately, with such a ripe phishing/fraud opportunity, in the coming days, I’m certain we’ll be hearing stories about companies being scammed out of their precious SVB dollars.
- Create and confirm wire approval flows - wires should always require multiple approvals with dollar-based thresholds. Make sure you know who is required to approve the wires so you can move fast when need be.
- Always communicate. Keep communication consistent, clear, and concise. Keep your leadership, staff, and board updated with how you’re keeping company money safe.
5. How can I stay informed and proactive about my financial strategy?
- If you do not have a CFO or VP Finance - I’d consider hiring a part-time or fractional CFO to make sure things are set up correctly - not only your bank accounts and cash but also your budget, projections, etc. I work with several startups that don’t need a full-time CFO but are now in a great place once they do.
- If you do have a CFO or VP Finance - everyone world-class in their field has a coach (or seven). Consider getting a CFO advisor you meet with once a week to talk through things and learn from other people’s mistakes.
Talk to Continuum about finding the right person for either option. They have an amazing community of executives and will match with someone like me that has the experience and availability your company needs.
Bottom Line: Make sure your cash is diversified and that you’re prepared operationally for another emergency. As you make your plan, proactively communicate with your board so they’re aware and aligned. And, finally, find people more experienced than you to help in the capacity that works for you.
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