Four Practical Steps You Can Take to Safeguard Your Cash
Sam Christian
Chief Financial Officer
March 17, 2023
It may be some time before the true impact of the SVB failure on the venture market becomes clear. In a sense, we were lucky that the situation wasn’t worse. SVB was “thinly bankrupt” when the actual market value of their long-term holdings was considered. Therefore, the gap between assets and liabilities was small enough that the cost of backstopping it was a lot less than the potential costs of *not* doing so. While SVB depositors dodged a bullet, this isn’t going to help valuations or the availability of equity or debt.
In the meantime, you can take four practical steps to protect your business:
- Diversify your banking relationships. Here are three criteria to consider:
Security: The top “systemically important banks” (JPM, Chase, Citi, WFB) have a higher standard of regulation and scrutiny as they have been deemed “too big to fail.” You may not love their technology or their service or their lending criteria, but you will love knowing they are the safest game in town. Keeping *at least* a payroll or two in one of these is a no-regret move.Service & Specialization: Regional and specialty banks have historically been the best service option for emerging companies and supporting them helps ensure healthy competition and innovation for consumers. We’d put SVB in this category for their world-class experience with venture-backed companies and their full suite of services — and with the FDIC backing now in place, SVB is arguably the safest possible place for your cash.
Systems: Tech-enabled fintech companies such as Mercury and Brex are technically not banks themselves but work with FDIC-insured bank partners to offer a suite of banking, credit card and lending services, wrapped in software.
- Diversify your debt and borrowing strategy.
This can get complicated as some lenders (including SVB) can require you to bank with them as a term of the loan (though this may be untenable for them moving forward). You should definitely negotiate deposit conditions in loans to ensure you have a right to keep multiple accounts – even if that means you must cap some amounts held at other institutions. Most banks under the three criteria above offer lending options, though some (e.g., venture debt, receivables financing, etc.) may not be available from every provider.
- If you have funds above FDIC limits at any institution, consider the following:
a. First, sweep amounts into a multi-bank money market. A sweep vehicle can store your cash in a multi-bank or multi-FDIC-limit network of banks that will keep you safe AND earn you a higher interest rate.b. Set up a treasury account for overnight or longer-term purchases of government-backed securities (this is typically best for larger balances, as this is more work to manage and offers less flexibility).
- Be vigilant to prevent fraud.
Everyone is going to be scrambling to change remittance information for multiple vendors over the next few weeks, and it is going to be an absolute field day for cyber criminals to phish you, your customers, and vendors. It is already happening, and cybercriminals are much more sophisticated than they were even a year ago. I can’t stress this enough – assume every request from every person – even if it appears to be a legitimate vendor – is phishing, and only switch remittance if you can verify with someone you trust to verbally confirm it.
The experts at Propeller Industries are continuing to monitor the market and the implications of the failure of SVB and Signature Bank. Reach out to us to help guide you.
As the SVB crisis unfolded, we kept clients informed of their options, potential impacts, and important steps to take. Read on to see what we shared in this time period.
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Update: 3/12/23 at 6:15 pm ET: Joint Statement by Treasury, Federal Reserve, and FDIC
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Updated as of 3/12/23 at 3:50 pm ET
Original post at 3/11/23 at 1:10 am ET
Background As most of you probably know by now, Silicon Valley Bank failed on Friday and was placed under the FDIC’s control. SVB was the 16th largest bank in the US and its collapse is the 2nd largest in US history. SVB had over $209 billion in assets, almost exclusively servicing venture-backed startups and many prominent VCs, so the impact of the failure will be felt disproportionately by our community.
Propeller has many clients who bank with SVB and we are working diligently to provide guidance and share information across companies while we await additional guidance from the FDIC about what to expect from the auction process they reportedly initiated late Saturday to find a buyer.
It is important to remember that even if you do not have funds at SVB, you could be seriously impacted by the failure in several ways because many of the customers, vendors, suppliers, and investors – that startups rely on – use SVB for critical services, such as payroll and bill payment.
While we will continue to issue updates as the situation evolves, we have compiled the following guidance with respect to potential issues, priorities, and industry resources:
FRAUD AWARENESS
It is absolutely CRITICAL that you exercise extreme caution in your process and controls over the coming days and weeks. Specifically:
- Any wire transfer or ACH remittance instructions should be verbally confirmed with a trusted contact before they are approved.
- As you set up new accounts and re-route payments, be on the alert for phishing & scammers who will try to take advantage of the chaos.
- Set up dual authentication/administration and wire limits wherever possible, particularly for outgoing wires on new cash accounts.
Cash
Cash protection/preservation should obviously be the immediate focus. If you don’t already have multiple business banking relationships, we recommend that you diversify as soon as possible to maximize your FDIC protection and spread risk, and we suggest at least one top-tier national US bank (e.g. JPMorgan Chase, Bank of America, Wells Fargo, etc.). Be prepared for possible delays in account openings as many banks are reporting backlogs.
We also recommend that you consider an additional relationship with a tech-enabled banking partner like Mercury or Brex, which work with partner banks to offer FDIC coverage above $250K, depending on which services and structure you choose. You may find that these firms can move more quickly than the big banks to open new accounts, and both offer credit card services in addition to banking.
Ideally, you should limit your exposure above $250K per depositor per institution as these are the maximum limits insured by the FDIC. For larger balances, “sweep” funds with treasury accounts can be set up to collect “excess” cash over the $250K limit and either (a) Spread it across a multi-bank portfolio (thereby getting multiple FDIC guarantees) or (b) Invest it into government-backed securities. Overnight government securities are a good option with liquid funds, which insures you beyond the FDIC limit and may also provide higher interest rates. Propeller will set up a webinar with a trusted partner to provide a short overview in the next few weeks.
Additional considerations as you prepare to transfer balances into new banking institutions:
- Consult with your board before you open new accounts.
- Be mindful of any transfer limits on your accounts.
- Review treasury policies that might restrict transfers or restrict the type of investment you can place cash into (i.e., debt covenants, liens, etc.).
- Do not move funds into a personal account or that of a separate entity without explicit approval from your Board, legal counsel, and tax counsel.
If you are an SVB customer, it has been widely reported that the FDIC has initiated an auction process to find a buyer and it is expected that an announcement will be made late Sunday. There is no guarantee that a buyer will emerge, or if one is found, that 100% of the uninsured deposits will be paid or when. For now, we recommend assuming it won’t happen – or at a minimum, that uninsured balances won’t be paid anytime soon.
The FDIC has stated that “All depositors will have full access to their *insured* deposits [$250K per depositor, *not* account] no later than Monday morning, March 13, 2023. The FDIC will pay *uninsured* depositors an advance dividend within the next week.” The “advance dividend” is the FDIC’s conservative estimate of what depositors can expect to recover. Because there is no way to know what that will be, we suggest not counting on it. If a deal is not made to guarantee 100% of deposits before Monday morning, the FDIC expects to issue “receivership certificates” for the uninsured balances of each depositor. It is expected that a market will emerge for these certificates whereby they can be exchanged for cash at a discount, however, it’s impossible to know how quickly that might happen or what the rate of discount or funding timeline might be.
For SVB customers with pending, outgoing transactions, whether wires, ACH, or checks – the safe assumption is those transactions will not go through. Bank communications will also be difficult as the FDIC owns all contact going forward. Expect no further correspondence from your SVB bankers.
Payroll
Whether your payroll processing is directly impacted by the SVB situation or not, your team will be nervous and concerned. The key is communication. If you are not impacted or only minimally impacted by SVB, be transparent and tell your team immediately in very clear terms. This reassurance can go a long way in maintaining team trust and unity. It is important to understand that there are very specific legal requirements for payroll. If you can’t make it, reach out to your legal advisor to make sure you do whatever you can to minimize risk.
If you are affected, first acknowledge the situation and reassure staff that no one has done anything wrong.
Immediately address the most important concern which will be getting paychecks and whether or not that is at risk. The risk can be from the inability to access cash in SVB or with a payroll provider that uses SVB to process your payroll. Propeller has drafted some sample employee email examples that may be helpful in communicating about your specific situation (see below).
For those banking with SVB, the FDIC is reported to be prioritizing payroll transactions and may make funds available if under the $250K limit starting on Monday, March 13. Payrolls in excess of $250K will likely need alternative sources of funding.
Rippling is among the payroll providers known to have SVB accounts and will require significant intervention in the coming days to ensure employees get paid in the coming week(s). If you haven’t already done so, review and act on all Rippling email requests immediately.
As far as other common payroll platforms, Gusto, Justworks, and Sequoia have reported no direct issues relating to SVB at this point.
Receivables
For those banking with SVB, many customers may have payments set up to automatically transfer to your SVB account. We recommend notifying your customers with instructions to remit payments to a non-SVB account, sending paper checks that you can deposit into an alternative bank, or holding payments until you can give appropriate guidance. Expect customers to reach out to you to confirm changes before they are made. This could delay the process but it’s important to prevent fraud.
Similarly, any systems you use for cash collection (e.g. Shopify, Amazon, PayPal, etc.) should either be updated to your non-SVB account information or put on HOLD until you can set up a new, non-SVB account to point them to.
Regardless of where you bank, if you have venture-backed companies as customers, it’s likely that many of them will be SVB customers, or strategically withholding payments to conserve cash while they assess the impact to their companies. Communication with these customers is paramount in order to understand if and how you may be impacted.
Payables
For those banking with SVB, you may not have access to more than the $250K FDIC guaranteed amount on Monday. If non-SVB accounts are available, consider having payments made from there. This would require adjusting your BILL (formerly Bill.com) payment source setup and changing your direct debit instructions with your vendors.
Regardless of where you bank, we are not yet clear whether or what impact will be seen at BILL. We’re closely monitoring this and will advise you if we have specific guidance.
Considering the uncertainty of the situation, communication with your vendors is paramount, especially for critical vendors. Most likely your company will not be the only one that is impacting any one vendor, so be transparent and forthright as this will put you in a more trusted position and may help alleviate any disruptions.
As mentioned earlier, be especially vigilant with requests to change remittance information for any vendor who claims to be impacted by the SVB collapse. The potential for phishing is extremely high. Propeller’s team has been extensively trained (and tested) to recognize these efforts, but it will be difficult to manage considering the mass effort to transition so many vendors at once.
SVB Credit Cards
For those with SVB credit cards, there is a high likelihood that future purchases will be declined in the short term so any recurring payments that are tied to that card need to be changed to another form of payment. SVB credit lines should be considered unavailable and adjusted in future cash flow planning. Both Mercury and Brex, offer credit card options in addition to banking.
Investors
We recommend over-communicating with your stakeholders about your company’s situation. We’ve already seen a number of founders send updates to all investors with a high-level summary of their exposure and actions they have taken or plan to take. Stakeholders who are not impacted may be able to assist in the short term with bridge loans or other financing avenues. Either way, solid communication is essential.
For those counting on incoming funding, we urge you to reach out to investors to understand their situation. SVB-impacted investors may no longer be able to deliver expected funds on the original timetable or may need to reduce the size of their investment. They might also be willing to loan you funding for a payroll or two if they believe it’s likely that SVB ultimately returns more of your capital or that the delay in cash flows is temporary.
Impact and Response: Next Steps
Please reach out to your Propeller CFO, who can assist you by modeling the financial impact to your company and reassessing your cash runway, while also helping you consider and evaluate alternatives.
Resources:
- FDIC: Failed Bank Information for Silicon Valley Bank, Santa Clara, CA
- Washington Post: U.S. officials weigh protecting all deposits at Silicon Valley Bank
- Forbes: What happened to Silicon Valley Bank
- Techcrunch: Interview with Mark Suster of Upfront Ventures
- CFO Leadership Council: Emergency Update
- Cooley: Common Questions Regarding Access to Funds
Bank contacts:
- JPMorgan Chase
LaSandra Hunt
Executive Director, Commercial Banker
J.P. Morgan
560 Mission St. Floor 20, San Francisco, CA 94105
T: 415 315 4990 | Work Cell: 415-378-8791
lasandra.hunt@chase.com
- Wells Fargo
Atin Garg – US East
Director, Relationship Manager
Wells Fargo Technology Banking
30 Hudson Yards, Floor 61 | New York, NY 10001
Tel 212-214-7203 | Cell 908-340-5942
Ericka Lynden – US West
Director, Relationship Manager
Wells Fargo Technology Banking
San Francisco, CA
(415) 407-5603
Erica.J.Lynden@wellsfargo.com
- Bank of America
Brad Pagano
Bank of America / AVP / Small Business Specialist & Business Development Officer
Wealth Management Small Business Banker
South Texas Market
P: 512-894-8768
bradley.pagano@bofa.com
Priority Small Business Support: 1-888-287-4637
Sample Employee Emails:
Scenario: Rippling Impacted Company, (under $250K payroll)
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Hello [Employee], On Friday, [Company Name]’s banking partner, Silicon Valley Bank (SVB), was put into receivership by the Federal Deposit Insurance Corporation (FDIC).
In an effort to ensure that you are paid on time and accurately, our US payroll provider, Rippling, switched from SVB to JP Morgan for their financial operations on 3/10/2023.
Here is some information that we can provide at this time:
What’s the current situation?
- As of this morning, funds [were/were not] withdrawn from our bank account for our [payroll date] payroll via [Payroll Provider]. Our understanding from [Payroll Provider] and our bank was that these funds should be cleared to [Payroll Provider]’s custody by 6 pm Pacific Friday, despite marketplace turbulence, allowing [Payroll Provider] to proceed with payroll as normal on [payroll date].
As of right now, what is the state of this situation per FDIC?
- On Friday, the FDIC stepped in to take control of SVB in an effort to protect depositors’ funds. A portion of our SVB funds will be available to us no later than Monday, March 13, 2023, which should enable us to make funds available for payroll.
We value you as an employee of [Company Name] and we will continue to keep you updated on the progress as information is made available. Thank you for your patience as we work through this!
Best regards,
[Company Name]
Scenario: SVB Impacted Company
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Hello [Employee], On Friday, [Company Name]’s banking partner, Silicon Valley Bank (SVB), was put into receivership by the Federal Deposit Insurance Corporation (FDIC).
Our highest priority is to ensure that you are paid correctly and on time, so we want to provide a summary of actions we are taking:
What’s the current situation?
- As of [Friday/Monday] morning, funds [were/were not] withdrawn from our bank account for our [payroll date] payroll via [Payroll Provider]. Our understanding from [Payroll Provider] and SVB was that these funds should be cleared to [Payroll Provider]’s custody by 6 pm Pacific [Friday/Monday] despite marketplace turbulence, allowing [Payroll Provider] to proceed with payroll as normal on [payroll date].
As of right now, what is the state of this situation per FDIC?
- On Friday, the FDIC stepped in to take control of SVB in an effort to protect depositors’ funds. A portion of our SVB funds will be available to us no later than Monday, March 13, 2023, which should enable us to make funds available for payroll.
We value you as an employee of [Company Name] and we will continue to keep you updated on the progress as information is made available. Thank you for your patience as we work through this!
Best regards,
[Company Name]
Sample email to customers to redirect SVB-bound payments
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Hello _____,
Due to the recent failure of Silicon Valley Bank, we are requesting that payment related to the attached outstanding invoices be sent via [preferred payment method] to the following address:
[*** address, if applicable ***]
If you are unable to process payment via check, please hold payment until [company name] is able to provide updated bank account information.
Please reply with confirmation that payment information has been updated.
Thanks,
[Company Name]
