Managing your bank account(s) after the collapse of SVB
The events of the last week have shown the importance of working with FDIC regulated institutions. The US financial system relies on the FDIC/OCC/Fed etc. serving as backstops in crisis situations. So given the new world how should one setup their banking strategy both personally and for their business?
"Banking is very good business if you don't do anything dumb." -- Warren Buffett
The events of the last week have shown the importance of working with FDIC regulated institutions. The US Govt takes this very seriously and protected ALL SVB depositors. There was uncertainty initially after the SVB failure on Friday, but Monday was business as usual. The US financial system relies on the FDIC/OCC/Fed etc. serving as backstops in crisis situations - but they only step in to help institutions that are regulated by them.
During the financial crisis the US Govt made emergency moves to make GS, MS, Amex and others "bank holding companies", so that they could help them through the crisis. They did not do this with Lehman Brothers.
So given the new world how should one setup their banking strategy both personally and for their business?
In the past, I always recommended working with the banking partner of your choice for your operating account, but now I would recommend using one that is regulated by a US Govt agency to reduce both financial & operational risk. This past week also highlighted the importance of bank branches, as folks were able to walk in and open accounts same day, and access funds via cashiers checks. Having multiple providers for your financial accounts is best.
For any cash in excess of 3-6 months of operations, I recommend directly buying and holding short term US treasury bills for safety, liquidity and market rates of return. Money Market Funds are also fine, but they add in a 3rd party provider who holds the underlying US Treasury securities on your behalf, rather than them being held directly in your name. If you are going to use a Money Market Fund, be sure to vet the sponsor of the fund & the fees being charged, as well as verifying that the fund is in fact meeting it's mandate and not investing in securities you are not comfortable with. There are several providers of these services that do a great job - banks, asset managers & independent RIAs.
An often over looked benefit of buying and holding treasury bills directly in your name is that it's one of the few securities where you have a direct claim on the US Govt even if the security is held at a bank or a brokerage, so the level of protection can't be beaten.
If you want to discuss your individual situation and brainstorm plans, feel free to reach out.
What does it mean for the U.S. Fed to taper?
So now that the covid-19 crisis seems to be ending (fingers crossed), the U.S. Fed has started mentioning the word “TAPER” in their news conferences and meeting minutes. This means that they will slow down their monthly asset purchases, and eventually end them.
At the start of the covid-19 crisis almost 18 months ago, the U.S. Fed was amongst the first to act. They acted swiftly and decisively to protect the global financial system and markets. Their primary acts were to drop short term interest rates to 0, and be a ready buyer for all types of securities (US Treasuries, Corporate Bonds, other currencies etc.). They essentially became the entity that was ready to backstop the global economy from a financial crisis.
They were able to do this by the sheer strength of their credibility and their ability to expand and grow their own balance sheet. They were able to buy securities to support the markets and make sure that they were functioning in an orderly manner. We also review the history of how the U.S Fed was founded so check it out if you are a history buff!
So the U.S. Fed spent the last 18 months “buying” assets and putting them on their balance sheet, so it grew. And I mean it GREW!
It doubled from $4.1 TRILLION to over $8.4 TRILLION, and it’s still growing! They are currently buying $120B of assets every month on the open market - $80B of US Treasuries and $40B of US Mortgage Backed Securities.
U.S. Federal Reserve Balance Sheet (Trillions)
source: Federal Reserve Board
So now that the covid-19 crisis seems to be ending (fingers crossed), the U.S. Fed has started mentioning the word “TAPER” in their news conferences and meeting minutes. This means that they will slow down their monthly asset purchases, and eventually end them. This would result in the U.S Fed’s balance sheet growth stopping, and eventually shrinking when securities mature (in a few years).
Financial markets all over the world are waiting with bated breath for the actual “TAPER ANNOUNCEMENT”. The U.S. Fed has been telegraphing that the time is coming sooner rather than later for the last few months. They are being extra careful & over communicating as they try to avoid a replay of the 2013 “Taper Tantrum”. Back then Ben Bernanke’s announcement took the markets by surprise! This caused instability, leading rates to spike higher temporarily, before normalizing. You can read all about it here.
What effect does this have on the real world?
When the world was freaked out due to the covid-19 crisis, the U.S. Fed expanded their balance sheet by buying securities. Now that things are getting back to normal, they are going to reverse course and stop this. The technical effect of this will be lower liquidity in the market, and the stopping of “money printing” by the U.S. Fed.
This is good because it will allow the markets to get back to functioning normally, similar to when painkillers are tapered off and eventually stopped. There may be a rise in the long term interest rates (think mortgages and long term corporate borrowings) in the near term, meaning that investors will be once again “paid” to take risk. Remember, the U.S. Fed did not need to get paid, as they have the ability to “print money”, which us mere mortals lack.
The next step, after the completion of the “Tapering” will be for the U.S. Fed to hopefully raise short term interest rates above 0 where they currently sit. They have said that they will do it very very slowly and only when they believe that the economy is on a very strong footing, as an increase in these rates will affect short term borrowings of businesses which can lead to economic slowdowns.
The upcoming “tapering” and eventual increase in short term rates will come as a welcome relief to savers as they will finally be able to earn some interest on their hard earned money.
In the meantime, the best things we can do are watch the U.S. Fed and the markets very closely, and keep our bond investments to short dated bonds. This way when the rates do rise, we will be able to take advantage at the earliest!
When money is cheap, corporations borrow!
There is always chatter about how money is cheap and big companies can borrow huge amounts at low interest rates. This post will provide insight into how much “cheap money” is really there, who is able to take advantage of it, and how they benefit and put it to use.
There is always chatter about how money is cheap and big companies can borrow huge amounts at low interest rates. This post will provide insight into how much “cheap money” is really there, who is able to take advantage of it, and how they benefit and put it to use.
When people refer to “cheap money” they are almost always referring to money that’s borrowed as a loan of some type - either from a bank or other financial institution, or directly from market participants in the case of bond issuances.
At a high level the mechanics of these “loans” can be straightforward. There is a principal (amount borrowed), an interest rate (that is paid), and a term (which can be fixed or variable).
The borrower gets the money and is able to use it for their corporate purposes and (hopefully) is able to generate a return greater than the interest rate they pay.
The lender collects interest payments, with return of principal at the end of the loan term.
We are now going to give you a glimpse into what’s been happening in the corporate bond markets in the last 18 months post being hit with COVID-19. Hint: The market is as strong as it’s ever been with yields at generational lows and bond issuances at all time highs!
Recent Corporate Bond Issuances (source: sifma.org)
As we can see corporate bond issuance has EXPLODED post COVID-19. Over $2 Trillion of bonds were issued in 2020 itself, and in 2021 we are on track to exceed that with over $1.2 Trillion already issued thus far.
This was made possible by the actions of the U.S Federal Reserve in response to the COVID-19 pandemic. They took the unprecedented step of basically under-writing the entire corporate bond market, by reducing interest rates to near 0, and starting to buy these bonds on the open market! If you wanted to sell, you always had a willing buyer, the U.S. Federal Reserve, and as we know their supply of funds seems to be unlimited!
Companies that could previously not get a loan anywhere, I’m looking at you Carnival Cruises, are able to raise Billions of dollars at comparatively low rates in the junk bond markets ($2.4Billion for 7 years at 4% in July 2021 source: Bloomberg). Oh, and the best part about these bonds is that they are unsecured! In the past, a lot of the debt that Carnival took on was secured by their cruise liners.
In the investment grade bond market, strong companies like Apple, Oracle & Salesforce are able to raise 10s of Billions with maturities extending out 40 years for just a few percent! Yes, you read that right, 40 years!
Here are the details of Salesforce’s recent $8B bond issue
$1.0 billion of its senior notes due 2024 (3yr) at 0.625%
$1.0 billion of its senior notes due 2028 (7yr) at 1.5%
$1.5 billion of its senior notes due 2031 (10yr) at 1.95%
$1.25 billion of its senior notes due 2041 (20yr) at 2.7%
$2.0 billion of its senior notes due 2051 (30yr) at 2.9%
$1.25 billion of its senior notes due 2061 (40yr) at 3.05%
Source: Salesforce Press Release
Now that’s cheap money! You must be thinking what are they doing with all this money?
Well, Carnival and other companies are using it to fund their day to day operation, as they are presently cash burning enterprises (due to the impact of the pandemic). Salesforce on the other hand is using this money to fund the acquisition of Slack (they are using this for the “cash” portion of the deal). Oracle and other similar companies are using this cheap money to buy back shares, as a way to return capital to shareholders.
All this sounds fine in theory, but the key idea that the bond holders of these companies are counting on is that whatever the companies do with the money, they are able to generate a sufficient return to PAY THE MONEY BACK with INTEREST. Because if that does not happen…
So now that we know that corporate bond issuance is at an all time high, what do we think will happen in the future? With the caveat that the future is hard to predict, we will make a guess that some of the weaker companies will have trouble paying back the money they have borrowed and will likely have to restructure their businesses in order to make bond holders whole.
Additionally, the other risk long term corporate bond holders take on is interest rate risk. So if we see any kind of inflation in the next few years, the folks that bought these bonds at rock bottom rates are going to see their returns suffer hugely. The increase in interest rates that inflation would bring, will reduce the value of these “lower interest” bonds, impacting real returns on capital.
The companies that issued the bonds on the other hand will be rewarded handsomely as they locked in that “cheap money”. They will be the ultimate winners no matter what rates do!
The moral of the story being that it’s always best to borrow money when you don’t need it, and when the economy is flush with cash looking for a place, any place to go!
What Coinbase does with their corporate cash
Coinbase is synonymous with Crypto, and they are “The trusted venue for crypto trading and custody”. Today we are going to review the financials and learn what they do with their cash and crypto - how much do they have, which cryptos they hold, and where they keep them!
Update (8/26/21):
Coinbase CEO Brian Armstrong told the world their balance sheet is changing.Coinbase will now put $500 million of cash and cash equivalents in a diversified crypto portfolio.
10% of quarterly net profit will go to the same portfolio, see Brian’s tweet here, and read the release on their blog.
We will continue to track what they do with their cash to see how this plays out. (edited)
Coinbase is synonymous with Crypto, and they are “The trusted venue for crypto trading and custody”. Today we are going to review the financials and learn what they do with their cash and crypto - how much do they have, which cryptos they hold, and where they keep them!
We were pleasantly surprised to learn that Coinbase is very conservative with their “Corporate Cash”, and that they primarily hold crypto for operating purposes and their “investment” in crypto is quite small compared to their cash position.
Coinbase balance-sheet cash breakdown
From the data above you can see Coinbase keeps 80% of their corporate cash super safe & liquid. They use a mix of bank accounts (both checking and savings), along with money market funds. For their USDC, the underlying U.S. dollars are held by the issuer (Coinbase) at federally insured U.S. depository institutions and in approved investments on behalf of, and for the benefit of, holders of USDC (per their latest 10-Q filing).
Unsurprisingly, their largest individual crypto holdings are the crypto’s that have the highest transaction volumes on their platform (BTC, USDC & ETH). It’s difficult to pinpoint how much of these are for “investment purposes” versus their trading operations. These crypto assets are self custodied and are also held at various crypto transaction venues to facilitate their core business.
Their ~$250M of BTC is just about 20% of the BTC that Tesla holds!
Those of you who have been thinking about parking a portion of your corporate cash in Crypto Assets should take heed of the conservative position that Coinbase has on the issue. Even, the premier crypto currency business in the world, holds just a small fraction of their balance-sheet assets in Bitcoin, Ethereum & other crypto currencies!
Why Tesla, Square & MicroStrategy Bought Bitcoin (and why you probably shouldn't with your company’s cash)
In the last few months companies that are household names (Tesla, Square) have bought Bitcoin(BTC) with their treasury capital. Another company, MicroStrategy, has made headlines by putting over 90% of their treasury assets into Bitcoin.
What may seem like a smart move for them may not translate into a good one for your company. In this post we explore the motivations behind these BTC buys and why it makes sense for them. Hint: They are not speculating, and have been quite targeted in their decision-making.
In the last few months companies that are household names (Tesla, Square) have bought Bitcoin(BTC) with their treasury capital. Another company, MicroStrategy, has made headlines by putting over 90% of their treasury assets into Bitcoin.
What may seem like a smart move for them may not translate into a good one for your company. In this post we explore the motivations behind these BTC buys and why it makes sense for them. Hint: They are not speculating, and have been quite targeted in their decision-making.
MicroStrategy
MicroStrategy was the first to really jump onto the crypto bandwagon. MicroStrategy is a Business Intelligence software company founded in 1989. Its founder, Michael Saylor, controls 72% of the voting power in the company via a multi class common stock set up. This means he has absolute control over the company and does not need board approval to do anything. This is very rare in publicly traded companies!
Here it is straight from the 10k:
“Mr. Saylor could transfer control of MicroStrategy to a third party without the approval of our Board of Directors or our other stockholders, prevent a third party from acquiring us, or limit the ability of our other stockholders to influence corporate matters.” - source MSTR 10k
MSTR is a profitable company and has been returning capital to shareholders for the last couple of years. It’s a low growth business at less than 10% per year. They had ~$560M on their balance sheet, and used it to transform their company into a publicly traded way to buy/sell BTC.
Before they bought BTC there was not much investor interest in the core MicroStrategy business. However it was a stable and profitable business. This, along with the total control that Saylor has, allowed him the opportunity to transform the MSTR stock into one that tracks the price of BTC, and become a pseudo BTC ETF when none existed! This was brilliant on his part, as it is very difficult for institutional investors (pension funds, hedge funds etc.) to get BTC exposure without going through a lot of regulatory headache.
He achieved this transformation in multiple steps starting in August 2020.
August 2020
Inform MSTR public market investors of the intention to hold BTC instead of USD as their treasury reserve.
Start a direct share buy back of shares of up to $250M. That gave investors who were not on board with the BTC strategy a way to exit their position. Investors had 30 days to participate.
September - October 2020
Once the buy back was complete, MicroStrategy started buying BTC with their cash reserves. They disclosed this in their Q3 earnings results on October 27, 2020. Interestingly, there was not much movement in the stock price. It hovered around $150 a share.
November - December 2020
During this time, the price of BTC increased from $10k to $20k. It appears people started to figure out that they could get exposure to BTC by buying MSTR stock. Anyone could do it via their plain vanilla brokerage accounts. They could do it with margin, and use the same derivatives they use on stocks to manage their positions. The proverbial regulatory gloves were off!
To increase leverage and make MSTR stock even more of a BTC vehicle. MicroStrategy issued $650M in convertible bonds, with the sole intention of buying BTC with the proceeds in December.
At the end of the year they announced that they had now purchased over $1B in BTC in the last few months!
The price of both BTC & MSTR took off, and as they like to say on reddit - to the moon!
February 2021
With the price of BTC continuing to rise and investor interest in using MSTR as a vehicle, MicroStrategy issued another $600M of convertible bonds to buy even more BTC.
MSTR & BTC (source: koyfin.com)
This strategy of converting the MSTR stock to a way for institutional investors to get exposure to BTC has paid off very well for MicroStrategy and their management. You can see that they have now started selling their MSTR shares over the last few months, locking in millions in profit!
Insider selling in MicroStrategy stock in the last few months (source: finviz.com)
The key takeaway is that they used their Treasury capital to make a bet on adding value to their shareholders.
I very much doubt that MicroStrategy is planning to sell their BTC and invest the proceeds back into their software BI business. However, if they do sell, they will do it to return capital to their shareholders in the form of dividends or buybacks.
Square
Square announced a few months ago that they had bought $50M of BTC from their ~$3B cash reserve. Some folks hailed this as a sign that more companies should start to keep part of their treasury capital in BTC. However, many miss a key difference between Square and other companies - Square has been allowing their customers to buy & sell BTC for a long time.
Since Square transacts in BTC on behalf of their customers, this move is most likely an attempt to hedge against the volatility of BTC on their balance sheet. It’s best practice to hold some amount of the currency one transacts in to prevent getting caught up in day to day market fluctuations. Multi-national companies that operate in Europe, for example, hold some of their cash in Euros. Ones that operate in India hold Indian Rupees etc...
We should also keep in mind that $50M is basically a rounding error for a company the size of Square.
Tesla
Now on to the most recent news in the space which is being regarded by some as a seminal moment. Tesla recently announced that they had purchased $1.5B in BTC using their treasury cash. This is a large amount, even for Tesla, as it amounts to about 50% of their net cash. They have ~$19B in cash but owe ~$16B in debt.
On the surface it looks like a big bet on the future of BTC by the world's richest man. Yet, as we dig deeper we find that Tesla is looking to start accepting payments in BTC. So like Square, this is a smart way to manage their future exposure to BTC and hedge any market fluctuations.
It would not be a surprise if Tesla starts offering the ability to purchase cars, place deposits for future cars and products using BTC in the near future.
The key point here is that Tesla made a business decision to leverage their treasury cash to enable their core business of selling cars!
The final words...
As we dig deeper into why these public companies have stocked their Treasury with BTC, we learn that it is NOT to speculate on the price of BTC, but rather, to further their core business or to completely reinvent it.
These companies are taking advantage of market conditions to increase sales, following best practices to hedge their BTC exposure (Square & Tesla) or completely reinventing their business (MicroStrategy). What they are doing is clever, but it’s not speculation on the price of BTC.
As always, I recommend that a companies' primary focus should be on keeping their treasury capital as safe as possible so that they can deploy it quickly to further business goals. Treasury capital is not for speculation. It’s for investing in your business.
Airbnb, DoorDash & Zoom - Analyzing their corporate cash portfolios
We have had a flurry of market activity this month along with the announcement of the most anticipated IPOs of year - Airbnb & DoorDash. I wanted to take this opportunity to analyze the corporate cash portfolios of these iconic companies while the news was fresh off the press!
We have had a flurry of market activity this month along with the announcement of the most anticipated IPOs of year - Airbnb & DoorDash. I wanted to take this opportunity to analyze the corporate cash portfolios of these iconic companies while the news was fresh off the press!
Zoom, Airbnb & DoorDash are very different companies, but you will see that a lot of the strategies they use to manage their corporate cash and keep it safe, liquid and earning a reasonable rate of return are quite similar.
Airbnb
Let’s start with Airbnb, who has been rumored to be one of the most sophisticated at managing their corporate portfolio. VentureBeat had an article on it a few years ago that you can read here. Their S-1 filing this week gives us a more detailed picture of what they're doing with their cash. All of this data is from their most recent S-1 filing with the SEC and as of September 30, 2020.
Total Cash, Cash Equivalents & Marketable Securities = ~$4.5B
For those of you interested in their historical positioning you can check out the details here.
Now let’s look at a breakdown of their cash equivalents and marketable securities.
Cash Equivalents = $208M
You can see they are being very aggressive with their positioning in corporate debt rather than in U.S. Government securities. This is likely because they are carrying over $2B in operating cash in their various banking relationships across the world. The highly transactional nature of their business means that they essentially run an internal payments company as well. However, they could probably tweak that and hold more cash in short term U.S. Treasury securities rather than in bank accounts.
Marketable Securities = $1.8B
In their marketable security portfolio you can see the aggressive bent as well, with only 40% of assets in government securities. The rest are in corporate bonds, with the most interesting being a nearly 10% position in mutual funds. One can only speculate as to which funds these are, but our guess is that these are closed end fixed income funds that give them a above market yield on their capital.
This positioning of their cash portfolio has allowed them to earn over $23M in interest income in the first 9 months ended September 30, 2020. That’s enough to spend $100k/year on Airbnbs for the next 230 years, or a pretty penny!
DoorDash
Pre-IPO, DoorDash has a cash hoard of ~$1.6B, and it’s sure to swell after a successful offering in the near future. Let’s take a look at how the savviest food delivery business manages their corporate cash.
All of this data is as of Sept 30, 2020 from their most recent S-1 filed with the SEC.
Total Cash, Cash Equivalents & Marketable Securities = ~$1.6B
Now, let’s take a look at their marketable securities portfolio which accounts for about 1/3rd of their liquid assets.
Marketable Securities = ~$515M
As we can see, DoorDash is following a very conservative strategy that gives them maximum safety and flexibility with their cash. They are not yet profitable (like Zoom) so they sensibly focus on liquidity of their capital rather than trying to maximize their interest income.
Even then they were able to earn ~$6M in interest income for the 9 months ended September 30, 2020. That’s over 700k Big Mac meal orders from DoorDash!
I don’t know the internal day-to-day cash requirements of their business, but we would recommend that they keep a larger chunk of their cash in U.S. Treasury Bills rather than bank deposits to maximize safety.
Zoom
Zoom IPO’d last year as one of the few “profitable” tech companies, and has seen incredible growth through COVID-19 as everyone has been forced to move online and into the virtual world.
Given this, let’s see what a fast growing company like Zoom does with their ~$1.5B cash on hand.
All of this data is from their 2nd quarterly filing as of July 31, 2020 (source: 10-Q)
Total Cash, Cash Equivalents & Marketable Securities = ~$1.5B
The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk.” (source: Zoom 10-Q)
Now let’s deep dive into their portfolio of “marketable securities” which accounts for about 50% of their liquid funds that are held for working capital purposes.
Marketable Securities = ~$732M
Additionally, ~$400M of these securities have maturities of less than 1 year, and the remaining ~$332M have maturities of between 1 to 5 years.
This type of strategy allows Zoom to be flexible with their cash. The short maturities help them stay liquid, and apportioning some cash to longer dated securities allows them to pick up additional yield on their capital.
They have earned over $2M in interest just in Q2, and a total of almost $8M in Q1 & Q2. Not too shabby! That is equivalent to almost 40k yearly Zoom enterprise licenses!
(source: https://zoom.us/pricing and 10-Q)
A key point to note is that they own these securities outright, and do not use funds, ETFs or other such synthetic instruments. Doing this allows them to control their capital, reduce risk and customize their investments to suit their specific needs.
Snowflakes in September - An analysis of Snowflake's corporate cash
Snowflake IPO'd as the hottest new company to come public in 2020. Salesforce and Berkshire Hathaway invested in the IPO, knighting Snowflake as "best of breed". Let’s dig into Snowflake’s S-1 to see how they manage their corporate cash!
Snowflake IPO'd as the hottest new company to come public in 2020. Salesforce and Berkshire Hathaway invested in the IPO, knighting Snowflake as "best of breed". Let’s dig into Snowflake’s S-1 to see how they manage their corporate cash!
If you are a founder, CFO, or manage your company’s corporate cash, take note. The lessons here are applicable to companies of all sizes.
Before IPO Snowflake had $886.8mm in “cash” on their balance sheet. Did they keep all that in a Bank of America checking account? Of course not. They know once you have more than $250k in a single bank account, you lose FDIC insurance protection. Instead, they focussed on maximizing the safety & security of their cash by investing it and earning a reasonable rate of return on their capital.
This line comes straight from their S-1:
“Our investments consist of U.S. government and agency securities, corporate notes and bonds, commercial paper, certificates of deposit, and asset-backed securities.”
Some back of the envelope calculations show that they have approximately:
Cash ~$83M
Cash Equivalents ~$55M
Short term investments (less than 1 year but more than 3 months) ~$423M
Long term investments (less than 3 years but more than 1 year) ~$295M
The lion's share of these “investments” are in U.S Government Bonds for safety, security and liquidity. They even go a step further by sprinkling in high quality, investment grade corporate bonds and some bank certificates of deposit. These assets help to increase the “interest income” on the cash they hold.
They have earned ~$4.1M in interest income alone in the first 2 quarters of 2020 (source: S-1). Not too shabby!
From a structuring standpoint, Snowflake appears to only keep enough liquid cash on hand to keep things rolling near term. Everything beyond that is invested out into the future to earn them more on their money.
Now, you may say, “Hang on. Snowflake is a multi billion dollar business. Of course they need to invest that capital, but my business is only a fraction of that size” To that I say it is never too early to start managing your cash like the best. Even if your numbers are much smaller, you’ll establish good practices that will serve your business well as it grows. You may not need to use every asset class they use. But it’s best to consider what they are doing and leverage some of their techniques to make the most of your capital.
Do not consider this a prescription but a simple illustration on how you can follow their lead.
Be wary of having more than $250k in any single bank account. Amounts beyond that put your cash at risk.
Amounts beyond $250k can be directed toward US Government securities. Those offer next day liquidity and unparalleled safety.
If you have cash visibility out to 6 months or longer, you can explore Bank certificates of deposit and high quality investment grade corporate bonds to increase the income on your excess cash. Think of them as a “no touch” until 6-12 months.
Again, this is not a prescription but a way to think about how to keep your cash safe and earn a reasonable rate of return.
Appendix: relevant sections from the Snowflake S1
Section that shows the breakdown of Cash & Cash Equivalents, Short Term & Long Term Investments
Section that details the breakdown of their US Government Bond holdings & Corporate Bond Holdings
Setting up your Corporate Banking & Treasury Strategy
A question I often hear is “Is my corporate banking & treasury strategy set up correctly, and if not, what do you suggest we change?” In this post, we’ll review how to answer that question for yourself and go over a few recommended banking and treasury management setups for different types of businesses that you can use as a starting point.
A question I often hear is “Is my corporate banking & treasury strategy set up correctly, and if not, what do you suggest we change?” In this post, we’ll review how to answer that question for yourself and go over a few recommended banking and treasury management setups for different types of businesses that you can use as a starting point.
Most folks are familiar with banks and the services they offer, but are less familiar with Treasury Management. A treasury team’s responsibility is to manage the company’s corporate cash, its liquidity needs and foreign exchange exposure. Fortune 500 companies have in-house treasury experts that help them optimize their financial resources.
What type of company are you?
In order to determine your general banking needs it is important to classify your business into one of these categories:
SMB – restaurants, coffee shops, gyms, boutiques etc.
Traditional – you built your company the old fashioned way without venture capital, and are consistently profitable
Early Stage Venture Backed – pre-seed, seed, and up to A round
Post Product market fit Venture Backed – B round and later
Investment Company – a company formed primarily for the purpose of investing pooled financial resources. This could be in stocks, bonds, real estate, venture capital etc.
Classifying your business correctly is important so that you can focus on not only your current situation but also anticipate future needs.
Assess your needs
When you get down to it, banks can help you do 3 main things.
Store Your Money – Checking & Savings Accounts
Move Your Money – ACH, Wire
Lend You Money – Credit Cards, Loans
Your business may make heavy use of certain services but not others, so keep that in mind when choosing a bank, as their services can differ greatly. This will help you figure out which of these services to prioritize as different banks and their corresponding accounts are optimized differently.
Initially, your business may not need the lending capabilities of a bank, however it’s good to plan for the ability to draw on a credit line in the future. Recently, many businesses found themselves applying for PPP loans due to the economic impacts of the coronavirus. However, only banks with lending capabilities were able to distribute these loans. If you were already banking with one of these banks, it was much easier for you to get your loan quickly.
It’s also a good idea to have access to a corporate credit card. Even if you don’t need it now, having access to credit can be an invaluable lifeline in an emergency where you need access to cash fast. Most banks will have a credit card on offer, but you can also get a card from independent credit card providers like American Express.
Big banks (JP Morgan, Wells Fargo, Bank of America etc…) offer more complex lending products like Term Loans, Working Capital Loans, Asset Backed Loans and Venture Debt, so if you bank with them you will have access to those products if you ever need them. However, even if you don’t bank with them now, you can still apply to get a loan from them.
The takeaway here is that it’s wise to bank with an organization that has at least some form of lending capabilities. It’s always easier to get a loan from a bank when you have a pre-existing relationship.
Companies are now increasingly global, so if you do a significant portion of your business overseas (>10%) you should definitely look for a bank that offers low transaction fees and favorable rates on the foreign currency that you transact in most often. You should also shop around for an independent foreign exchange provider as they may be able to get you more favorable rates, especially if you work with less common currencies (i.e Indian Rupees, Nigerian Nairas etc.)
To sum up, every bank offers the ability to store money, make payments, and have a business credit card. However, different banks are better suited for one over the other, so you should pick the bank which gives you the best deal & most flexibility for your specific needs.
Developing a corporate cash and treasury management strategy
As mentioned earlier, the primary responsibility of a treasury team is to manage the company’s liquidity and corporate cash. Because needs vary across different types and sizes of companies, any company with more than $250k in assets should formalize their goals and strategic objectives in an official corporate cash management & investment policy. This will allow them to plan strategically and make the most of their resources.
Based on the level of cash reserves your organization has, here are some suggestions to begin developing a treasury management strategy.
Less than $250k
If you’re a small business or just getting started, and run a lean operation, then the simplest option is likely the best. A checking account with a linked savings account at your favorite neighborhood bank is a solid bet. You can get a credit card from the bank itself or from an independent provider like American Express. Spend some time shopping around for the best deal for your specific needs.
Over $250k
If your business has healthy cash reserves and you are able to stash some away for a rainy day, it makes sense to leverage the services of a strategic treasury management provider (like InterPrime!) in addition to a traditional bank. The bank can help with your day to day operations like paying bills and collecting revenue, while the treasury provider works to make the most of your longer term strategic cash. Additionally, since FDIC insurance is capped at $250k per bank per account, an independent provider can help you assess risk and plan more effectively for the future.
Another benefit of working with an independent provider is that they are not beholden to any bank and generally have a fiduciary responsibility to you. This means they are legally obligated to put your interests above all else, effectively operating as part of your team. They will help you devise a corporate cash management policy for your business that defines where assets will be custodied, the types of securities that your cash will be held in, and define specific liquidity and risk parameters (more on this in an upcoming post!)
They will also be able to give you a holistic view of your business finances and how you can effectively leverage the various financial tools that are available to further your business.
Wrapping up
Developing your company’s banking and cash management strategy can be daunting. There are a lot of options out there and it’s easy to feel overwhelmed. However, with a little bit of research and careful consideration of your long term needs, you can find the right providers for you and develop a strategy to set your business up for success.
Presence over productivity.
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Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Amet aliquam id diam maecenas ultricies mi eget mauris. At auctor urna nunc id. Eu lobortis elementum nibh tellus molestie nunc non blandit. Dui sapien eget mi proin sed libero. Dolor sit amet consectetur adipiscing elit ut aliquam purus sit. Sed ullamcorper morbi tincidunt ornare massa eget. A condimentum vitae sapien pellentesque habitant. Cras tincidunt lobortis feugiat vivamus at augue. Habitant morbi tristique senectus et. Consectetur purus ut faucibus pulvinar elementum integer enim. Iaculis urna id volutpat lacus laoreet non curabitur. Tellus integer feugiat scelerisque varius morbi enim nunc faucibus. Velit sed ullamcorper morbi tincidunt ornare massa eget. Quis blandit turpis cursus in hac. Elementum facilisis leo vel fringilla. Tincidunt arcu non sodales neque sodales ut etiam sit. Vitae nunc sed velit dignissim sodales ut eu. Et malesuada fames ac turpis egestas integer.
Maintaining your creativity.
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Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Amet aliquam id diam maecenas ultricies mi eget mauris. At auctor urna nunc id. Eu lobortis elementum nibh tellus molestie nunc non blandit. Dui sapien eget mi proin sed libero. Dolor sit amet consectetur adipiscing elit ut aliquam purus sit. Sed ullamcorper morbi tincidunt ornare massa eget. A condimentum vitae sapien pellentesque habitant. Cras tincidunt lobortis feugiat vivamus at augue. Habitant morbi tristique senectus et. Consectetur purus ut faucibus pulvinar elementum integer enim. Iaculis urna id volutpat lacus laoreet non curabitur. Tellus integer feugiat scelerisque varius morbi enim nunc faucibus. Velit sed ullamcorper morbi tincidunt ornare massa eget. Quis blandit turpis cursus in hac. Elementum facilisis leo vel fringilla. Tincidunt arcu non sodales neque sodales ut etiam sit. Vitae nunc sed velit dignissim sodales ut eu. Et malesuada fames ac turpis egestas integer.
The benefits (and pitfalls) of working in-house.
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Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Amet aliquam id diam maecenas ultricies mi eget mauris. At auctor urna nunc id. Eu lobortis elementum nibh tellus molestie nunc non blandit. Dui sapien eget mi proin sed libero. Dolor sit amet consectetur adipiscing elit ut aliquam purus sit. Sed ullamcorper morbi tincidunt ornare massa eget. A condimentum vitae sapien pellentesque habitant. Cras tincidunt lobortis feugiat vivamus at augue. Habitant morbi tristique senectus et. Consectetur purus ut faucibus pulvinar elementum integer enim. Iaculis urna id volutpat lacus laoreet non curabitur. Tellus integer feugiat scelerisque varius morbi enim nunc faucibus. Velit sed ullamcorper morbi tincidunt ornare massa eget. Quis blandit turpis cursus in hac. Elementum facilisis leo vel fringilla. Tincidunt arcu non sodales neque sodales ut etiam sit. Vitae nunc sed velit dignissim sodales ut eu. Et malesuada fames ac turpis egestas integer.
Putting yourself in the client's shoes.
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Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Amet aliquam id diam maecenas ultricies mi eget mauris. At auctor urna nunc id. Eu lobortis elementum nibh tellus molestie nunc non blandit. Dui sapien eget mi proin sed libero. Dolor sit amet consectetur adipiscing elit ut aliquam purus sit. Sed ullamcorper morbi tincidunt ornare massa eget. A condimentum vitae sapien pellentesque habitant. Cras tincidunt lobortis feugiat vivamus at augue. Habitant morbi tristique senectus et. Consectetur purus ut faucibus pulvinar elementum integer enim. Iaculis urna id volutpat lacus laoreet non curabitur. Tellus integer feugiat scelerisque varius morbi enim nunc faucibus. Velit sed ullamcorper morbi tincidunt ornare massa eget. Quis blandit turpis cursus in hac. Elementum facilisis leo vel fringilla. Tincidunt arcu non sodales neque sodales ut etiam sit. Vitae nunc sed velit dignissim sodales ut eu. Et malesuada fames ac turpis egestas integer.