Our 3/13/23 Note to Heavybit Founders & CEOs - Key Banking / Cash Management Steps to Take This Week
[Note: This is the email we sent to our founders and CEOs last night - the situation is obviously changing by the moment. We're sharing here in case it is helpful to the broader community. It's not specific advice for you or your situation.]
The last few days have been nerve-wracking for everyone and we have been working closely with all active portfolio companies to ensure continuity of business. We currently believe everyone is now in a position to meet their payroll and other obligations. If anything changes or you have any concerns about your ability to make payroll and other payables this week and month, get in touch with us immediately so we can help.
For all companies—regardless of where you are banking—there are some key actions you should take calmly, but immediately this week.
This event underscores the importance of risk assessment for cash & treasury management. It is our view that all material balances should always either be insured or under segregated custodianship. Early-stage companies without a finance function are most likely to be out of compliance with this policy, though this event has exposed that many large sophisticated organizations (and investors) are as well. This is a good time to review.
Balances at banks exceeding the $250,000 FDIC limit should be insured or subject to segregated custodianship. This can be accomplished in various ways depending on your bank and situation, here are some examples:
- Enroll in ICS
- ICS (insured cash sweep) is a product of IntraFi which is offered by many banks and breaks up deposits overnight and spreads them around to other banks to maintain FDIC coverage
- some banks have minimum account balances and/or maximum balance caps for ICS
- some banks have automatic/included ICS enrollment (though most do not)
- there are other products under other names that achieve similar coverage; ensure you understand where the money will be held and whether FDIC coverage will be maintained over every dollar
- Create Cash Sweeps
- Cash sweep products continuously move funds in excess of the FDIC limit into a money market account (MMA), money market fund (MMF), or other account type which either carries higher insurance limits, or sits with an external custodian (e.g. Morgan Stanley, BlackRock, etc.)—meaning it is not on the bank’s books and can be recovered directly in the event of bank insolvency
- exact custodianship of MMA/MMD/MMF/sweep products is important
- most MMAs/MMDs are banking products which are commingled with the bank’s assets and are subject to the $250k FDIC limit
- generally MMFs are securities held by an external custodian
- Simple test: if FDIC insurance applies, then it sits on the bank’s balance sheet and does not provide sufficient protection over $250k
- securities held by an external custodian which is a registered broker-dealer are protected from custodian insolvency by the SEC’s Consumer Protection Rule (CPR) which requires full segregation of your securities from the custodian—they are held directly in your company’s name
- in selecting MMF type products, the priority is preservation of capital, not returns
- Hold Treasury Cash in Brokerage Accounts at large institutions and transfer only working capital into business banking accounts on an ongoing basis
- important to ensure treasury funds are with a custodian subject to SEC’s CPR (see above) and/or are insured and invested in safe products (prioritizing preservation of capital over returns)
- important to ensure cash management at the bank is configured to avoid/protect large balances
Banks make money by keeping your capital on their balance sheets so these products are often confusing. Diligence requires that you work with your bank to determine the right products and coverage, and rely solely on formal legal documentation, not marketing copy.
In addition, risk can be further reduced by operating on a dual banking basis, where at least one of the banks is a Systemically Important Bank (SIB) as defined by the Financial Stability Board.
It’s important to work with your board and financial advisors to have a Standard Investment Policy for cash and treasury management which includes protections from institutional solvency risk.
For larger organizations with a sophisticated Investment Policy, we suggest you immediately review it with your team—we have found that while many go into great detail on acceptable asset types, they don’t address institutional solvency risk and business continuity, especially for cash management.
We can’t give formal legal or financial advice and want to underscore that you must find solutions that comply with any regulations, covenants, or corporate policies you are subject to. If you need help sorting this out, please get in touch with us.
Please don’t hesitate to call, text, or email any of the Heavybit partners with any questions or issues. We are ready to help.
-Dana, James, Jesse, Joe, & Tom