SVB & Signature Bank Fail: Three Strategies to Maximize Liquidity
Marion Street Capital recommends that innovative growth companies immediately take three steps to mitigate liquidity risk. The failure of Silicon Valley Bank (“SVB”) and Signature Bank caused widespread uncertainty regarding the stability of regional banks, and it nearly caused dozens of innovative growth companies to fail as their abilities to process payroll were briefly threatened. This led to record inflows of $15B in customer deposits to bulge bracket banks like J.P. Morgan Chase and Bank of America.
#1
Insure your full cash balance through a cash sweep service such as Reich & Tang (“R&T”).
Most banks offer this virtual cash sweep option, although few companies seem to know about it. Through this mechanism, companies can effectively insure millions across virtual accounts. You may need to ask your banker about this, as most banks do not “advertise” this service, and many banks call this type of service by a different name.
R&T is a financial services company that has been providing cash management solutions for over 45 years. With its expertise in managing liquidity for corporations, municipalities, and other organizations, R&T has become a trusted partner for companies with balances exceeding $250,000 FDIC insured limits. There are three key benefits:
Maximum deposit security: R&T has a long-standing reputation for managing cash reserves, and they provide insurance coverage for their clients' funds. Effectively, their service spreads cash balances out across virtual accounts, with each account not exceeding the FDIC deposit insurance limit of $250,000. For example, if a company had $10MM in the bank, this mechanism creates 40 virtual accounts, each with a balance of $250,000, eliminating any deposit risk. Companies can still seamlessly access their funds through their primary accounts at their host banks.
Higher yield: Many companies keep their excess cash in low-yielding bank accounts, earning minimal interest rates. The R&T cash management solution provide a range of investment options that can earn higher yields than traditional bank accounts.
Optimized liquidity: Companies need to maintain sufficient liquidity to meet their short-term obligations, such as payroll, vendor payments, and debt service, but they should also look to maximize low risk yield on those reserves. R&T accounts can facilitate achieving this objective.
#2
Utilize a brokerage account, such as Interactive Brokers.
While it comes with some level of risk, Marion Street Capital recommends companies maintain a brokerage account to earn higher returns on excess cash.
As companies accumulate cash balances, it's important for them to consider how they're managing those funds. While traditional bank accounts may seem like safe options, there are many advantages to using brokerage accounts to manage cash balances. There are several reputable brokerage firms that offer cash management solutions specifically designed for corporate clients. Some of the top options include Charles Schwab (recently acquired TD Ameritrade), Interactive Brokers, Fidelity, and E*TRADE (acquired by Morgan Stanley in 2020). Note, some balances in brokerage accounts might not be FDIC insured, though there are three key benefits:
Higher returns: Many traditional bank accounts offer minimal interest rates, which means that companies are essentially losing money on their excess cash by keeping it in those accounts. With a brokerage account, companies can access a variety of higher yielding investment options, such as Treasuries, money market funds, and shorter-duration bond funds. The first $250,000 of company ownership of noncash securities are generally protected by SIPC insurance, which does not protect against any decline in value of those securities, but does protect the owner against failure of its brokerage.
Greater flexibility: With brokerage accounts, companies can usually transact among securities relatively easily, allowing them to dynamically adjust their cash management strategies based upon market conditions or upon changing business needs. This flexibility can be especially important during times of economic uncertainty, when companies may need to quickly adjust their cash reserves to manage risks or to take advantage of opportunities. Brokerages may also offer other services, such as foreign currency exchange or international wire transfers, that may not be available through traditional banks.
Greater transparency and control: With brokerage accounts, companies can easily track their investment performance and see how their cash is being managed. They can also set specific investment criteria or restrictions to ensure that their cash is being invested in a way that aligns with their corporate values or financial goals.
#3
Keep at least three months of operating expenses on hand for profitable companies and up to twenty-four months of operating expenses on hand for unprofitable ones.
Marion Street Capital recommends companies maintain at least three months of forward estimated operating expenses on hand.
It's essential for companies to have a safety net in the form of cash reserves, and maintaining at least 3 months of operating expenses is a sound financial practice. Having a cushion of cash provides businesses with flexibility to manage unforeseen circumstances and to ensure that they can continue operating without relying on external sources of funding. Keeping fewer than three months of cash reserves exposes companies to risks that threaten the viability of those companies. What if there is another lockdown? What if there is an unforeseen legal expense? What if a material vendor wants to dramatically change pricing or terms? What if key employees demand material compensation increases? What if the environment for external financing worsens? What if a material new revenue opportunity demands a significant investment into working capital? What if a key customer walks? Companies need time to navigate challenges such as these and keeping at least three months of cash reserves can buy them a quarter to do so. Unprofitable companies may require up to 24 months of cash reserves, as there is no guarantee that external financing will be available when those companies need it. Maintaining more than 24 months of cash reserves at an unprofitable company seems beneficial, but it can lead to undisciplined choices around hiring, capital expenditures, and other uses of cash.