Protecting your corporate or small business bank accounts from the possibility of a bank failure seems like one of those worries that shouldn’t keep a small business owner or C-suite executive up at night.
Then came the failure of Silicon Valley Bank. And Signature Bank. And the rescues of First Republic Bank and Credit Suisse.
Jamie Dimon, the Chief Executive Office of JPMorgan Chase who rallied big banks to rescue First Republic, said in his annual letter to shareholders that it ain’t over yet. Even when the current crisis ends, he wrote, “there will be repercussions from it for years to come.”
Suddenly, a good night’s sleep is just as much at risk as your company’s cash.
So we asked four of our RED Team CFOs to share their advice about how small business owners and executives at lower middle market and middle market companies can protect their business bank accounts in an uncertain banking environment where the next bank failure is as close as the next viral tweet that sends depositors scrambling to make immediate withdrawals.
Please note that these experienced CFOs offered advice based on their personal opinions – it should not be considered tax or legal advice.
Understand FDIC Rules
The FDIC (Federal Deposit Insurance Corporation) is an independent government agency that insures deposits of up to $250,000 at U.S. member banks, which pay the insurance premiums.
That insured amount is the total for each depositor. So if a business has three different checking accounts at one bank, the insurance would cover the sum total of the deposits vs. covering $250,000 per account. A small business owner’s personal bank accounts, however, would be covered separately as a different depositor.
At banks displaying the “Member FDIC” label, deposit accounts such as checking and savings accounts, certificates of deposit, and money market accounts are covered by FDIC insurance. Investments such as stocks, bonds, mutual funds, life insurance, annuities, and crypto assets are not covered by FDIC insurance. (Credit union deposits are insured by the National Credit Union Administration.)
When SVB failed, nearly all of the financial institution’s depositors had accounts totaling more than $250,000, in some cases far more. and if you thought being bigger would be a defense against getting caught in a bank failure, consider that the streaming service Roku, which reported $2.7 billion in revenue for 2022, said in an SEC filing that it had nearly half a billion dollars deposited at SVB.
Fortunately for Roku and the other SVB depositors, the FDIC jumped in and said it would cover all deposits.
Still, the fact that an estimated 97 percent of SVB accounts were bigger than $250,000 demonstrates “failures of complacency,” says Michael R. McKenzie, long-time interim CFO.
And, CFO Michael Hand adds, “The next time a regional bank failure happens, the administration is not necessarily going to backstop the depositors. As a matter of fact, I believe the odds are they won’t.”
So what is a company to do?
Spread the Wealth
Depending on your organization’s day-to-day cash needs, divide up the assets and put them into business checking accounts and business savings accounts such as money market accounts or another type of account that can be easily accessed.
Then spread the money around to as many regional banks as needed to keep the accounts below the $250,000 maximum, Hand says. And remember, once the account hits $240,000 and you earn interest of $10,000, you are bumping up against the $250K limit, so you will want to move some of that money to another financial institution.
Then, he suggests, deposit excess money at two or three giant banks, such as JPMorgan Chase or Bank of America. Finally, depending on your business finances and upcoming cash needs, buy Treasuries that roll over three, six, and nine months down the road.
McKenzie notes it’s how Warren Buffett manages Berkshire Hathaway’s $138 billion of cash – a mix of bank accounts and short-term US obligations.
CFO Steve Ferguson uses Sweep accounts managed by global banks to disburse depository risk for excess operating cash.
“For medium-term monies and/or larger amounts, I’ll ladder multiple maturity lengths of U.S. Treasury Bills. For long-term monies, I use a CD Broker to buy 1-year CDs at multiple banks for $250k each with staggered maturities and set them up on auto roll; this eliminates depository risk and keeps interest rate risk in check.”
Get the Board on Board
CFO Frank Bisconti recommends developing a board-approved policy statement to govern corporate investment strategy. That’s a strategic document that outlines guidelines for achieving a company’s investment goals.
It should describe the company’s financial goals and investment objectives, the roles and responsibilities of all parties involved in managing portfolios, and the framework for the asset allocation and risk management of a company’s assets, he says.
The policy statement lays the foundation for a company-financial advisor relationship and details how the financial advisor will make investment decisions. It also helps to set and manage expectations around market outlook and spending outlook and it provides guidance to portfolio managers when making portfolio decisions.
Perhaps most importantly, Bisconti says, the policy statement “helps to keep companies from making emotional decisions related to their portfolio.”
Get Some Help
That kind of active cash management requires an experienced Chief Financial Officer.
If your company is too small to be able to afford a full-time CFO, consider hiring a part-time or fractional CFO. You can get the benefit of a rock star CFO for a fraction of the cost and pay for just the hours you need. It could be as little as a few hours or a few days each week and the relationship can last as long as you like.
Contracting with InterimExecs to supply a fractional CFO is low risk. It comes with a standard 30-day cancellation clause, so you can scale up or scale back services as need be.
An experienced CFO working on a part-time or fractional basis can manage all of your company’s financial needs, from managing cash flow and financial assets to negotiating with lenders to restructure your debt.