On Thursday, people started to panic about their money sitting in Silicon Valley Bank accounts, starting a bank run to withdraw their deposits. When the bank didn’t have enough money to fulfill requests, the FDIC stepped in and closed the bank.
That left a lot of businesses with crisis situations on their hands. Unable to access their cash, what do they do about payroll and vendors? How do they collect money? What happens to all that cash above FDIC insurance limits? Will this put a company out-of-business?
What Happened at Silicon Valley Bank
Silicon Valley Bank has been around for about 40 years. For most of their history, they were a small, regional bank just doing their thing.
In about the past decade, they began really bankrolling Silicon Valley and the California venture capital community. During the pandemic years, with all the VC activity going on, their balance sheet exploded. So many accounts and with very large balances. About 97% of the balance sheet was above FDIC insurance limits.
Because they did not have the experience to handle these large balances (they didn’t have a Chief Risk Officer for a year), they went to some default answers – low interest Treasuries and Mortgage Backed Securities.
Then the Federal Reserve started raising interest rates, above what the bonds were paying. And the VC activity slowed down. So SVB wasn’t getting the same kind of inbound cash flows that they had been.
Old Fashioned Bank Run
On Wednesday last week, SVB announced that they liquidated a large portion of their treasuries for increased liquidity. And when they did this, they took a significant loss.
This spooked investors and depositors. And because SVB had such a high concentration of customers in one industry, a closely connected community, they communicated quickly.
On Thursday, VCs were telling their portfolio companies to get all their money out of SVB. By Friday, it was a tsunami, too many claims for the bank to be able to handle, to send out the cash.
That’s when California and the Feds stepped in, closing down the bank. They immediately paused all activity in accounts, making them inaccessible to customers.
That sent the customers and many businesses into a second crisis, what do they do now.
Flashbacks to 2008
For those of us old enough to remember, we are having flashbacks to 2008 banking crisis. From Bear Stearns and Lehman Brothers to a large number of smaller, regional banks, a lot of banks failed.
Since the news broke on Friday about the FDIC shutting down SVB, we’ve been wondering if there was a risk of other banks collapsing.
Initial signs point to an overall healthy banking system. This particular bank had unique risks – the large concentration of accounts from one industry (VC and technology) with very large balances and an investment portfolio that didn’t align with current conditions. Other banks are more diversified across industries and have made different investment decisions.
But as people start assessing their risk portfolios in the coming days and weeks, some additional smaller banks may also fail. I don’t think that there is a need to panic right now, but it is wise to have a game plan in place. Banks can go down for a variety of reasons at any time.
Action Plan When Your Bank Has Failed
This time it is SVB. Next time it could be your bank. Here’s the immediate game plan.
- Immediately establish a secondary bank account
- Transfer the deposits out of the failed bank to your new account
- When the FDIC takes over, there is usually a period where you cannot access your accounts. You’ll want to follow the FDIC, the bank, and others reporting on the issue for news on when you can access the money.
- The money may become available in stages (the $250k insured amount first and then additional amounts as the FDIC liquidates bank assets. You may have to file claims to recover your cash)
- Change inbound payments that you have direct control over:
- Credit card processors
- Change outbound payments to pull from your new account:
- Payroll processors
- Credit card payments
- Vendor payments
Cash Flow Analysis
Once you get the account situation stabilized, now you have to figure out how much cash you have on hand and what you will be spending it on.
On Friday, we knew that the FDIC was going to release the insured amounts of $250,000 per depositor on Monday. We didn’t know when any additional amounts were going to be available. Also, the lines of credit were going to be closed and we couldn’t rely on those.
That means that there were a lot of accountants that spent Friday and the weekend preparing cash flow analysis, to try to figure out how long companies were going to be able to stay in business.
When you are in a crisis, don’t spend time trying to make a new app work. Just use good old Excel or Sheets, whatever you are most familiar with.
You’ll want to create a 13-week cash flow analysis that you update daily until the crisis subsides.
Prioritizing Outgoing Cash
You’ll prioritize outgoing payments into three categories:
- Mission Critical
- Less Urgent
You should have very few in mission critical. This should be your payroll and taxes and anything that will shut down your business if not paid immediately.
And even payroll, you should quickly start assessing who you can furlough for immediate savings and who is mission critical to keep things going. You’ll want to take into consideration employment agreements, federal and state laws on severance payments and WARN act type of advance notification requirements in your analysis.
This is also the time to figure out where you can take hits like late fines and penalties, but still delay payment. Which vendors are willing to let you go longer considering the crisis. What can you pay minimum payments on and carry a balance? What vendors can you switch to a credit card?
And will insurance help with any of this?
Prioritizing Incoming Cash
This type of crisis is one where having really good customer relationships can come in very handy. First, you’ll need to get the customers to change their payments to your new bank. I’ve had some customers take months if not years no matter how many times we send them instructions to update our payments. That’s going to be a problem in a crisis.
Second, for those that you have a good relationship with, they may be willing to pay you earlier than normal. The best customers won’t even require a quick pay discount. But if a discount for early payment is what it takes, you need to get that cash in the door.
Third, can you run sales or other promotions to get some new customers or cash in the door? A lot of e-commerce were running sales over the weekend with promo codes like “BANKRUN” to get people to buy. Often in these situations, people want to help and this is one way that they can.
Reconcile Bank Accounts
When your bank fails, you end up with a closed account. You’ll need to know exactly what checks, ACHs, and wires were outstanding and which had already cleared. You’ll also need to match up customer payments and third-party processors.
This will also give you information on who to follow-up with you see if they eventually get their ACHs or checks and if they clear. Or which customers need to re-initiate payments.
You know all of this by reconciling your bank account.
Having this information available is also very important for your discussions with the FDIC to make sure that they have an accurate accounting of your bank balances. While the SVB collapse appears to be pretty clean on the customer recordkeeping side, there have been bank collapses where the records were a mess. Be your own best advocate with good records.
Get Your Bank Records
Once the FDIC opens access to your online accounts, you’ll want to get as many of your bank records as you can.
We aren’t always good about downloading and saving bank statements because we believe that the bank will always have them. So check which ones you have and download the rest.
You’ll also want to gather things like:
- Cleared check registers
- Outstanding check registers
- Account Agreements and Contracts
- Loan documents
- Loan statements and transaction history
- Tax documents
Basically, any report that your bank provides, run them and download them. You can figure out what you need later, but once access goes away, you may never get it again.
Lines of Credits and Loans
When the bank fails, your lines of credit and loans are going to be closed. In some very specific and narrow cases, the FDIC may allow some to stay open. But, by and large, you are saying good-bye to your existing credit. Term loans will likely be sold to a new bank. Even some LOCs. But most short-term revolving credit will not be available any longer.
That means that you now have to negotiate and open a new line of credit with a new bank. In an emergency situation. Now with higher interest rates.
It’s not a good time to be doing this, but you’ll likely need to figure out what you need for your short-term needs. Many financial institutions are offering short-term bridge loans to help out.
In some cases, you can also turn to your shareholders for short-term loans or cash injections.
Action Plan for Everyone
A bank collapse affects more than the depositors at the bank.
One thing that became very clear with the SVB collapse is how interconnected we are. In this case, many of our FinTech vendors are connected to the now failed bank. This means that our payment processors, our payroll processors, and our customers are affected. And that means we are affected.
Any time that there is a crisis, you need to be able to execute a solid communication plan. Think about your external and your internal stakeholders.
On Friday, a big concern was “are my employees getting paid on time?” No matter if you had an SVB bank account or not, you needed to communicate this with your employees on Friday if you had a payroll that was expected to be in the employee account on Friday or Monday.
After that, it became identifying your exposure and letting people know:
- Consultants (esp attorneys and accountants that can help you)
It’s important that you have a crisis management plan in place regarding communications – who can speak on behalf of the company, especially publicly.
But here’s the thing – silence is not acceptable. That is going to bread problems within your organization. Transparency is a big deal when things are going on. No one expects perfection, but letting those affected know what you are doing and how you are solving the problem goes a long ways to calm the chaos.
Review Your Vendors and Partners
Everyone, not just those with SVB accounts, should also consider which of their vendors were using SVB.
Even if you don’t have a bank account at SVB, you were likely in crisis mode on Friday when payroll didn’t go through if you used Rippling or Patriot. And the companies that didn’t use SVB were out there in PR crisis mode, reassuring customers that their products were safe.
Over the weekend, our friends at the Cloud Accounting Podcast put together a list of financial apps that are affected (or not affected) by the SVB shutdown.
This was a time where being active on Twitter was great for communication with your vendors and others that you rely on for cash.
It literally took 5 minutes before fraudsters were trying to get in on the action and take advantage of the crisis.
The most prevalent fraud scheme that we have seen so far has been emails and communications trying to impersonate either corporate officials or bankers, to get you to transfer money to them instead of the new bank (for those with SVB accounts or for those doing business with SVB customers).
A crisis is a time that you need to double-down on all your fraud prevention measures, no matter how much time they take. Check and double-check those wire requests. Make sure that you are emailing the correct person.
And don’t rely on one form of communication. If you get a money transfer request via email, then you need to pick up the phone and talk to them. Don’t use the phone number on the email either – use the numbers you have stored in your phone or earlier emails.
After The Crisis
Now that the immediate next steps are taken care of, it’s time to start to think about how we build more resiliency into our businesses going forward.
Insuring Large Account Balances
We cannot rely on the fact that the FDIC will step in to backstop balances over $250,000. That means that we need to put into place processes to hold larger balances.
There are banking products already in existence that make it possible to keep larger balances. Large corporations have been using sweep accounts for decades.
In sweep accounts, the banks take the balance down to zero, spreading out the balances among several banks. But it all goes through one banking relationship on your end.
You can also look into private insurance.
Back Up Bank Accounts
What if you could skip one of those steps in the crisis plan?
Now is a great time to setup a secondary, back-up bank account for your business. Go ahead and link your payment processors and vendors to this account. So if your primary account is ever unavailable, you can quickly flip everyone to the new account.
If your business is flush with cash, you can leave an entire payroll cycle worth of cash in it. Or one month of operating expenses. Just make sure that it is all insured.
Bank and Vendor Analysis
One of the big lessons that will come out of the SVB collapse is our role in risk management – for our banks and our vendors.
We learned that SVB required an exclusive relationship for borrowers. This put these companies behind the eight ball when it came to crisis management. Do they breach loan covenants or do they risk leaving their money in the bank? I anticipate that there will be a lot more push-back on the exclusive condition in the future (primary is fine, but not exclusive).
In addition to our bank relationships, we will be looking at our financial related vendors. Do they have multiple rails or payment relationships with multiple banks? Are their banks solid? And what is the financial banking and risk for these vendors?
Another really important thing to remember with SVB is that many of these VCs and their portfolio companies are young companies. They don’t have CFOs or advanced internal finance teams.
Going forward, we need to put an earlier emphasis on CFOs and internal finance. This needs to be an earlier hire – finance is getting more complicated and faster. Every company needs this function built out within their company.
What’s Next for SVB
On Sunday, the FDIC released a statement saying that all deposits were going to be available. Even the amounts over the insurance limit.
This was a big relief for SVB customers.
But there are still a lot of questions. It’s a developing situation, so as we learn more lessons from this episode, I’ll add to this post.