5 tips for wiser cash management at startups

By Vital Laptenok, general partner at F1V

Many startup founders had a long and anxious weekend when Silicon Valley Bank went bankrupt on March 10. U.S. financial regulators stepped in and took control of its customer deposits, but the uncertainty of the financial markets continues. Signature Bank has recently gone bust too, and Credit Suisse is to be acquired by its rival UBS.

The past has taught us that even the largest banks can fail during times of economic instability. This was evident during the Great Depression of 1929-1939 and the Great Recession of 2007-2008.

Rather than worrying about which bank might fail next, startups should focus on strengthening their treasury management strategies to reduce financial risks and avoid getting caught up in a bank run.

Distribute funds among banks

In turbulent times, the chances of a bank going bankrupt are much higher because of rising interest rates, greater risks of loan defaults, losses from investments, large withdrawals by customers, and stricter government rules.

Besides, any bank might decide to suspend or block accounts due to security or other reasons even when the economy is stable. Hence, having just one bank account is never safe.

Startups should diversify their funds across 2-4 banks (not affiliated banks), ideally in different countries, and monitor what each account is used for. An ideal scenario would be to maintain two operating accounts with enough cash for 2-3 months in each and a third account for investing extra cash in safe and liquid options.

If it’s hard for you to manage 3-4 accounts simultaneously, try setting at least one for everyday business operations like payroll or paying suppliers and another for holding the remaining funds.

If your startup has over $3 million on the balance sheet, get a saving account with one of the A-level banks that are less likely to fail like Deutsche Bank or Crédit Agricole in Europe, JPMorgan Chase & Co or Citigroup in the U.S.

Consider buying Treasury Bills (or T-Bills), U.S. government bonds issued in U.S. dollars with a maturity period from one month to one year, which also have an annual yield of up to 5%. Doing so might protect your money in case of the bank’s bankruptcy, because your T-Bills would still be held separately and wouldn’t be affected by the bank’s financial situation. These assets are highly liquid and can be sold at any time before they mature.

A great idea would be to develop an investment policy with a focus on preserving capital — not making max profits. Don’t keep your investor’s money in cryptocurrency.

Choose your bank in the right country

When choosing a bank for your startup, evaluate not only its security but also the broader factors that could affect its stability in a specific country (especially if there have been occurrences of bank failures).

To pick a bank in a suitable jurisdiction, examine local laws and regulations that govern the banking industry. Assess the political climate and economic security, including factors such as inflation, interest rates, and currency and financial stability.

Check deposit insurance offered by regulators, institutions

Each country has its own financial regulators to oversee the financial system. The Federal Deposit Insurance Corporation (U.S.) and the Financial Services Compensation Scheme (U.K.), for example, are designed to protect deposits with insurance if banks are to fail — at least to a certain degree.

The U.S. The FDIC insurance coverage limit is $250,000 per depositor, per insured bank. However, some financial firms may offer extra deposit insurance coverage beyond the FDIC limit through private insurance companies or bank-type organizations.

After the fall of SVB, the U.S. financial platform Brex has increased the FDIC insurance coverage for its business accounts to $2.25 million, while neobank Mercury said its customers’ deposits now have insurance of up to $3 million.

Other ways to increase deposit insurance coverage are using certificates of deposit accounts (CDARS), credit unions, or the MaxSafe program allowing to increase FDIC insurance to $3.75 million.

The U.K. The Financial Services Compensation Scheme (FSCS) provides deposit insurance coverage of up to £85,000 per depositor, per bank.

Some private banks and building societies (a type of financial institution) in the U.K. may offer startups additional deposit insurance coverage above the FSCS limit through their membership in the FSCS Temporary High Balance Scheme (THBS). It may offer extra protection for deposits of up to £1 million for up to six months.

Europe. Each country in the European Union (EU) is required to have a deposit guarantee scheme (DGS) in place to protect customers in the event of a bank failure. In most EU countries, DGS provide insurance coverage up to €100,000 per depositor, per bank. Non-EU bank, however, might provide no deposit insurance for businesses.

Certain European countries, both EU and non-EU, have additional insurance options. For instance, many private banks in Germany are members of the Association of German Banks that protects deposits of up to €50 million. In Norway, the Bankenes Sikringsfond covers deposits up to 2 million kroner per depositor, per bank.

It can take 6-18 months to open an account with an A-level bank, which is why startups often start by launching an account with an e-money institution like PayPal, Wise, or Stripe.

These payment platforms typically offer a faster account opening process, taking up to several weeks, and smoother customer experience. But the capital stored there is usually not insured by financial regulators.

Check what types of bank accounts and amounts of funds are covered by the regulator in your country and which additional insurance options you may have there.

Make banks like you

If you have a higher level of profile at your bank, you may receive more personalized communication regarding the status of your accounts or investments. To warm bankers up to you, consider making an investment account and buying some shares or debt obligations through them.

Another way to make banks like you is to entrust them with managing your funds. Banks typically generate their main profits from managing the money of High Net Worth Individuals (abbreviated as HNWIs), people or businesses with investable assets of at least $1 million. In CEE, the average commission for investment management services is around 1-1.5%.

Final advice

Having a good financial strategy and contingency plan will be increasingly important in 2023 and beyond. Make a cash flow projection for the next month and revise it on a daily basis. Maintain a rolling forecast of upcoming bills, their due dates, and expected inflows.

To prevent fraud and ensure secure financial transactions, establish a system of approvals and verifications for money transfers (applying the “four eyes” protocol is a good idea).

In case of potential turbulence, inform the executive team and the board members, keep them updated. Also, secure a line of credit from one of your primary banks that can finance the company for half a year. But refrain from using it unless absolutely necessary.

As an investor, I think that startups with smart money management strategies always have an advantage when raising funds. Startups that don’t manage their money properly, meanwhile, will make investors nervous: such startups can suddenly run out of cash.

I also recommend reading a blog post by Christoph Janz, managing partner at Point Nine Capital, to learn more about cybersecurity and banking relationships.

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