How Startups Can Manage Their Cash Better, According to a VC | Entrepreneur

How Startups Can Manage Their Cash Better, According to a VC | Entrepreneur

The bankruptcy of Silicon Valley Bank caused a great deal of stress for many startup founders. Although U.S. financial regulators intervened and took charge of customer deposits, the incident has shown that financial markets remain unstable.

Amidst a banking panic, Signature Bank has suffered bankruptcy, while Credit Suisse is being acquired by its competitor UBS; First Republic Bank’s customers have recently withdrawn over $100 billion.

To avoid being swept up in a bank run like this, startups should concentrate on getting better at cash management and fostering strong relationships with banks. That’s something VCs are going to pay more and more attention to when deciding to invest in a startup.

Here are four tips that startups could take to minimize their financial exposure.

Tip #1 — Put money in multiple banks

When the economy is unstable, the likelihood of bank failures rises due to factors such as higher interest rates, increased risk of loan defaults, investment losses, large customer withdrawals and stricter regulations by the government.

But even in steady economic conditions, banks may decide to freeze or close accounts for security or other reasons. That’s why relying on a single bank account is never a safe option.

Businesses should distribute their funds across two-four non-affiliated banks, preferably in different countries, while closely monitoring the activity of each account. I’d recommend keeping two checking accounts with sufficient cash to cover 2-3 months of expenses in each one and a third account for investing any surplus cash in safe and liquid assets.

Those who find managing more than three accounts challenging should have at least two. One account can be designated for regular business operations such as payroll and supplier payments, while the other can be used for holding the remaining funds.

For startups with a balance sheet exceeding $3 million, it is advisable to open a savings account with a reputable and stable A-level bank such as JPMorgan Chase & Co or Bank of America in the United States, Deutsche Bank or Crédit Agricole in Europe.

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%. If a bank goes belly-up, T-bills won’t be impacted by the bank’s financial position because they are kept independently from the bank’s finances.

A clever idea would be to create an investment plan that prioritizes capital preservation rather than aiming solely to profit. Never hold the money of your VCs in cryptocurrency — it’s too risky.

Tip #2 — Research countries, not just banks

When you choose a bank for your startup, don’t just look at how secure it is. Think about other factors that could make it stable or unstable in a particular country, especially if there were times when banks went bust there.

To find a bank in the right place, learn about the local rules and laws that control banks there. Evaluate economic and political climate, including inflation rates, the amount of interest banks charge and the stability of the currency and banks in that location.

Tip #3 — Learn about deposit insurance provided by regulators, institutions

Different countries have their regulators that manage their financial systems. For instance, the United States has the Federal Deposit Insurance Corporation, and the United Kingdom has the Financial Services Compensation Scheme.

These regulators are intended to safeguard bank deposits to a certain extent by providing insurance in case of bank failure.

The U.S. The FDIC insurance typically covers up to $250,000 per depositor per bank for individuals and businesses. Nonetheless, certain financial companies may provide additional deposit insurance options.

In the wake of SVB’s collapse, U.S.-based financial platform Brex has upped its FDIC insurance limit for companies to $2.25 million. Meanwhile, neobank Mercury has increased deposit insurance for its customers to 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. U.K.-based startups can obtain up to £85,000 deposit insurance coverage per bank, per depositor, via the Financial Services Compensation Scheme (FSCS).

Private banks and building societies (a type of financial institution) offer deposit insurance above the FSCS limit by joining 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. In the European Union (EU), all member countries must have a deposit guarantee scheme (DGS) to safeguard customers in case a bank fails. DGS usually offers coverage of up to €100,000 per depositor, per bank. However, non-EU banks may not offer deposit insurance for companies at all.

Some European countries — both EU and non-EU — have supplementary insurance opportunities beyond the DGS. In Norway, deposits of up to 2 million kroner per depositor, per bank are protected by Bankenes Sikringsfond. In Germany, many private banks are part of the Association of German Banks, which provides insurance coverage for deposits of up to €50 million.

Due to the lengthy process of opening an account with an A-level bank (6-18 months), many startups prefer e-money institutions such as Wise, Stripe or PayPal instead. In this case, the account opening process is faster (a few weeks) and offers a more seamless customer experience. But financial regulators don’t normally protect the funds kept there.

Tip #4 — Warm banks up to you

By developing a rapport with your bank, you can benefit from more individualized updates on the status of your accounts and investments. One way to strengthen this relationship is by creating an investment account and buying shares or debt obligations through the bank.

To establish a favorable relationship with banks, consider entrusting them with the management of your funds. High Net Worth Individuals (HNWIs), who possess investable assets of at least $1 million, are the main source of profit for banks through their money management services. In CEE, the standard commission for investment management services averages around 1-1.5%.

In my experience as an investor, startups that adopt smart cash management strategies have the edge over their rivals when trying to raise funds.

Create a plan for how much money you will have/need for the upcoming month; check and update it every day. Keep track of when you have to pay bills and when you expect to receive funds. Make sure to have a process for approving money transfers to avoid fraud; try to use the “four eyes principle.”

If you anticipate any financial difficulties, notify your executive team and board, and reserve a credit line from one of your key banks to support the company’s operations for at least six months (but use it only if necessary).

This content was originally published here.