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SVB Fallout: 3 Ways to Mitigate Your Banking Risk

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Most of us don't think about treasury management every day (or month, or year). When you have money in the bank, you expect it to be there for your use.

But the recent collapse of Silicon Valley Bank has highlighted uncertainties in the system. Tim  Hanson provides a full recap of the SVB situation in the podcast episode. Here, we outline Permanent Equity CFO Nikki Galloway’s advice on how to turn that uncertainty into an opportunity for small businesses, so the money they have on hand is actually available for them to use. 

A lot of small businesses hold all their funds in one account. The SVB situation highlighted the fact that, as a regulator, the FDIC offers insurance on deposit accounts, but they only insure up to $250,000, per depositor, per institution.

So, when you're thinking about your money in the bank, you want it to be safe, and you want it to be as liquid as you need it to be. And then, after you've addressed safety and liquidity, you can think about return. 

Below are Nikki’s three steps for thinking through treasury fund management:

  1. Understand what your cash needs are (in terms of safety, liquidity, and return). You may need your cash to be totally liquid all the time or you may only need a chunk of it to be liquid, meaning you can do some safe investing. Others might have a cash flow that covers most of their needs and they can invest most of their cash.

  2. Call your bank to discuss the products they provide and how they can help you meet those needs. A lot of folks set up a banking account, only talk to their bank when they need a loan or a line of credit, or there's some transaction that they're trying to work through, and otherwise let it ride.

  3. Determine what options provide you the right balance of safety, liquidity, and return. Some options include:

    1. Insured Cash Sweep One treasury risk management option is to rely on FDIC insurance across multiple banks. There are several programs banks participate in where they can take your money and spread $250,000 deposits overnight across other banks. Then it's fully liquid while still being fully insured by the FDIC – whenever you need to make a payment, the bank will do transactions in the background to make it available. The drawback? There's no return – in fact, you'll pay a fee for the safety and liquidity.

    2. CDARS With this option, instead of putting your money in deposit accounts, you're buying CDs at banks under the $250,000 limit. Here, you’re earning a return, but your money's tied up for four weeks, 90 days, or a year. whatever you might need. And, your balance in a CD at a bank counts against that $250,000 limit.

    3. Money market account Instead of spreading your money across deposit accounts, you can spread your capital across money market accounts. Then, you can then earn a little bit of interest and keep it under the FDIC limit. This option is generally more liquid, but the return is not as high because you're still having to pay a fee.

The bottom line: As a small business, you don't generally need access to all of your money all at one time. You need money to operate and you need a little cushion in case something bad happens. Then, if any money beyond those needs is sitting in an account, can you earn something off of it? 

And, through all of those considerations, you want to find options that ensure your money is safe (i.e., not in one account at one institution).


To hear more conversations like this one, subscribe to Permanent Podcast on your favorite podcast app.