In the wake of Silicon Valley Bank's collapse, CFOs at small-to-mid-size businesses (SMBs) are now reevaluating their strategies for managing cash. Diversifying cash accounts is a great idea in theory, but can be complex and inconvenient to manage without the right strategies and solutions in place.
This article provides detailed information from banking and finance professionals on the Silicon Valley Bank collapse, what diversification is, and actionable strategies that SMBs can put in place right away to ensure cash is protected without compromising convenience, liquidity, or return.
What Happened with Silicon Valley Bank (SVB)?
The collapse of Silicon Valley Bank, also known as SVB, in March 2023 sent shockwaves throughout the business community, particularly among small-to-mid-size businesses. Founded in 1983, SVB quickly gained a reputation as a leading player in the startup world, providing loans, lines of credit, and other financial products to a wide range of companies.
One of the key factors that set SVB apart was its focus on innovation and entrepreneurship. It actively supported and invested in the startup ecosystem, hosting events and providing mentorship and networking opportunities to help entrepreneurs scale their businesses. Its demise was a stark reminder of the risks associated with aggressive lending practices and insufficient risk management.
"The commercial nature of the deposit base at SVB has caused lots of attention, not just from the businesses but the investors behind the businesses and the like. It's been a significant change in the attention we'd give to treasury relative to a few months ago," adds Chris Sands, CFO at IntelyCare.
Given SVB's prominent role in the startup community, its collapse has sent shockwaves throughout the business world, particularly among small-to-mid-size businesses regarding the security of their cash.
"While the banking industry on the whole is strong, it's important to recognize that failures have been a part of history and its something that we need to be mindful of. Silicon Valley bank had $200 billion in total assets when it failed -- the 2nd largest bank failure in our country's history next only to Washington Mutual. Not only have we been through a period of time with a small number of failures, but we also had two of the largest failures that happened almost in back-to-back days, and very quickly," says David Cota, Executive Vice President at First National Bank of Omaha.
As CFOs and financial managers reevaluate their strategies for managing cash, diversifying cash accounts has emerged as a key strategy for mitigating risk.
What is Cash Diversification?
The main objective of cash diversification is to ensure that a business' cash is protected against the risks associated with a single bank failure, while maintaining convenience, liquidity, and return. It involves spreading out cash across a variety of banks and other financial institutions, such as credit unions, money market funds, mutual funds, and more.
Why Should SMBs Diversify their Cash?
Small businesses are particularly vulnerable to bank failures due to their limited financial resources, and often lack the sophisticated risk management strategies available to larger organizations. As such, the loss of a single account could be catastrophic, leaving them without access to capital and unable to pay bills or meet other obligations.
In addition to mitigating risk, diversifying cash accounts can also yield cost savings. By spreading out money across multiple banking institutions, businesses can often take advantage of cheaper fees, higher interest rates, and other benefits that are not available through a single bank.
FDIC Coverage Limitations
Though most accounts are insured against bank failure, the standard FDIC coverage for deposits is $250,000, regardless of whether the account is owned by one person or an entire corporation. While this may be sufficient for some individuals or businesses, many SMBs have than $250k in cash on hand, which would mean the remaining cash balances would be at risk.
Bank Failures are More Common than Perceived
Though bank failures are typically considered rare, the reality is that they happen more frequently than most people realize. In fact, according to the FDIC, since 2001, 563 of 4,326 banks have failed due to a variety of factors including insufficient capitalization and excessive risk-taking. These failed banks totaled in $1.04 trillion in assets, and $786 billion in deposits. As a result, it's critical for small businesses to be aware of their exposure and take steps to protect themselves in the event of another failure.
Failures Aside, Change is Constant
Even without bank failures, there is a lot of client disruption in the banking space:
- Big banks buy smaller banks
- Branches change hands
- Brands, relationships, and banking products are disrupted.
Taken together, CFOs and finance leaders at SMBs need to be vigilant in managing their cash and diversifying their accounts on an ongoing basis in order to ensure a secure financial future for the company.
Where things get tough is the actual setup and cash diversification of accounts when done manually.
Our latest webinar covers insights from banking & finance professionals on cash diversification strategies.
Setbacks of Manual Cash Diversification
Though most CFOs are beginning to consider stronger cash diversification and management amid the SVB crisis, the actual process, when done manually, can be extremely difficult to maintain.
Sands adds, "This notion of spreading out commercial accounts into $250,000 chunks is easy in theory, but is not simple for the person tasked with setting up those accounts, managing them, reconciling them every month when they do their balance sheet."
For CFOs to manually spread and maintain cash across accounts while ensuring balances are within the FDIC coverage limit level of $250,000 in EVERY account requires a great deal of effort, time, and expertise to manage. It’s incredibly time-consuming to open, fund, and manage multiple accounts.
"Many businesses are wondering: how am I going to move money between accounts? How do I balance my accounts to ensure that I'm staying below the threshold that I'm willing to accept? How do I do my month end close in a simple way? How do I report my cash balances? What I worry about is once this 'risk exposure' feels like it has died down, we'll fall back into the same place, naturally concentrating our deposits in one place once again, which is never a good idea," says BC Krishna, CEO of Centime, Inc.
Tough Invoicing & Bill Payment Decisions
In addition to being time-consuming, with manual diversification, CFOs must decide which bills to pay out of each bank account, which accounts to deposit money into, and when to pay them in order to rebalance deposits for risk mitigation. Managing ALL the accounts gets to be difficult rather quickly.
The manual process can also be cumbersome from a compliance standpoint. For instance, businesses must update their KYC information at every bank whose account they hold—a tedious task that is required to maintain the account in good standing and ensure ongoing.
Complex Cash Reporting
Additionally, account aggregation is a manual process, which makes reporting tricky. With more accounts, comes more statements, and more room for error in reporting and forecasting. Month end close and reconciliation is also complex.
When done manually, cash diversification costs add up quickly. SMBs may have to pay higher fees in order to spread their cash across multiple accounts. Finance teams are met with higher fees, and often do not get the best interest rates across multiple accounts.
Disjointed Account-to-Account Transfer
With manual diversification of cash, a single transfer between bank accounts can be tedious and expensive. And with more account diversification comes more combinations, more tedium, and more costs.
Incomplete Risk Management View
It's difficult to maintain adequate risk management with a manual process, as CFOs do not have the visibility to see their cash flow and activity across all bank accounts in one view. It's easier to make mistakes without a birds-eye view.
With these pitfalls of manual cash management in mind, most SMBs are looking to diversify their cash accounts sooner rather than later in order to guarantee a secure financial future.
CFOs are Planning to Diversify Accounts After Recent Failures
To limit exposure to a single bank failure, CFOs are exploring cash diversification options. In fact according to a recent Gartner survey from March of 2023:
- 85% of CFOs are concerned about the impact of failures on operations
- 28% plan to diversify their deposit base across more and new banks
- 17% want to improve cash visibility
But how? Cash diversification can be a daunting task for CFOs and finance managers alike, mostly because they don't know where to begin or how to diversify quickly.
Introducing CentimeSecure: Automated Cash Diversification for SMBs
To make it easier for businesses to diversify without sacrificing convenience, liquidity or return, Centime is introducing CentimeSecure — an automated cash diversification and management solution for SMBs.
CentimeSecure offers a number of features that can help businesses protect their cash without sacrificing convenience:
- Automated diversification and insurance
- Higher interest income — realize a higher return on liquid assets with higher interest rates than typical business banking accounts, while maintaining access to liquid cash.
- Liquidity — no limits on the number of transactions.
- Visibility and reporting — view aggregated and individual balances and transactions across banking relationships.
- Easy money movement — transfer money in near real time between any bank accounts at no cost.
- Convenience — use the account for financial operations like any other account, make and receive payments as before.
- Security — guarantee against electronic payment fraud up to $100,000. CentimeSecure includes "cybercrime" insurance to cover fraud on a customer's account.
For specific insights from banking and finance professionals on cash diversification strategies, view Centime's recent webinar here.
SVB's collapse was a wake up call for SMBs to consider cash diversification strategies now rather than later in order to protect against future risks and disruptions. With CentimeSecure’s robust features and automated process, SMBs no longer need to worry about their cash, but can rest assured that it is safe and insured.