The sudden collapse of Silicon Valley Bank on Friday sent shockwaves across the venture capital and startup communities, forcing business owners to scramble as they looked to shore up their finances, fearing a bank run could eliminate their uninsured balances. Thankfully, the joint announcement on Sunday from the FDIC, US Treasury, and Federal Reserve helped to shore up the banking system by backstopping all deposits and assuaging fears of a “Great Financial Crisis redux.” This led to a collective sigh of relief as depositors were granted access to their impacted accounts, ensuring at the minimum, that payroll would be made on time this week.
While events like this are certainly rare in their occurrence, they serve as an important reminder to business owners and entrepreneurs to be hyper-focused on their companies’ finances through the lens of risk management. Similar to many of the challenges faced throughout the pandemic, there is an opportunity for founders to reassess pain points in their operations in order to mitigate any future issues.
The following are three important lessons that we believe should be prioritized for business owners in the wake of SVB’s unwinding:
- Rethink your cash. A diversified strategy built around your company’s short- and medium-term liquidity needs may reduce your business’s institutional risk in addition to its asset class risk. Many banks also offer sweep accounts that automatically transfer excess cash to partner banks to expand FDIC insurance, helping to reduce the need to personally open many bank accounts.
- Plan for rainy days. Having access to an adequate lending facility will help to mitigate short-term liquidity or funding issues that may arise. The most common issue, however, is that many owners fail to realize the need for additional sources of capital until, well, they actually need it. Planning ahead when there are clear skies will have you prepared for when the clouds start forming.
- Spring cleaning. An immediate side effect of this past week could be tighter lending standards as banks look to preserve liquidity. Tighter standards and a higher cost of capital could further delay a recovery in the middle market’s private M&A market. Business owners who were planning for a potential exit or capital raise this year should take this opportunity to fine-tune the intangible elements of the business that could eventually drive value when deal activity returns. Examples include improving or skilling-up middle management, resolving customer concentration issues, or shoring up outstanding vendor or customer contracts.
Please contact your UBS Financial Advisor to discuss how the firm is supporting business owners during this challenging time.
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Main contributor: Eric Marrello
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Review code: IS2301688