14 Steps To Follow When Your Bank Goes Insolvent

When a bank becomes insolvent, it means that the bank is unable to meet its financial obligations and repay its debts. Learn how to protect your business finances if you are a customer of an insolvent bank.

The recent uncertainty for Silicon Valley Bank (SVB), following an announcement that the bank will no longer be offering their services to companies in certain industries, including cryptocurrency and cannabis, has caused dread anxiety among startups that have investments with the financial institution.

What started as some smoke has quickly been fanned into a full-blown fire as widespread panic has caused startups to pull their investments and raised financial outlook concerns in a debacle that may be the biggest since the 2008 collapse of Lehman Brothers.

With many companies scrambling to find alternative banking solutions, the situation highlights the need for all businesses to do a thorough due diligence before making investments and lends us to look at the considerations and steps to follow in the event that your bank becomes insolvent.

14 Steps to follow when your bank is about to become insolvent

1. If the bank at risk is the only account your business banks (in this case SVB) with then you would need to open accounts with two other AA or A-rated banks. Consult a CPA when opening a new account.

2. Build a 4-week cashflow forecast: Assess and monitor daily receipts and payments to create a cash flow forecast for your business to assess its immediate financial position.

3. Assess cash management daily to check actual income against your forecast report. This helps you understand and monitor how your financial situation and then reforecast based on daily actual figures.

4. Update key players within your organization daily to aid cashflow crisis management as the figures are updated in your business.

5. Don’t throw fresh money on the fire: Redirect future cash receipts and revenue into a business account held with another bank.

6. Categorize your suppliers according to whether they would be showstoppers, meaning that you cannot get products without paying them; or if you can pay them as you can; or whether you potentially do not need to pay them at all while you manage the crisis.

7. Secure any liquidity that you can: Pull any deposits or bonds back into an account that is not at risk.

8. Communicate a salary deferral plan with your top team. The CEO usually takes the highest percentage salary cut during a crisis. This is also to be communicated with staff and other employees to let them know that a plan is in place to protect the salaries of the operational staff.

9. Elevate sign-off of all new points of sale to the CEO and CFO jointly. These should be carefully considered.

10. Make a list of your survival headcount. This would be the bare minimum staff on which your business can operate. Include this in your phased forecast and implement changes at each danger level – this plan may help you prioritize payroll later. Feed all new financial information and decisions made, back into your four-week rolling daily cash forecast plan.

11. Find out how to get your Federal Deposit Insurance Corporation (FDIC) benefit paid. The FDIC typically insures up to $250,000 per depositor, per banking institution, per ownership category.

12. Keep investors informed: Share the latest forecasts on the situation with your investors and the measures you are taking clear to them. Offer them regular updates to help them stay abreast any sudden and notable changes to your forecast budgets.

13. Engage your investors for emergency bridging finance. This may be a tough ask, but if the financial outlook of your business is grim enough, this may be a good option to explore. It may offer you the liquidity to keep operations running smoothly while you recover.

The following institutions are also offering bridging capital support to businesses affected by the SVB crisis:

  • Liquidity Group is offering a term sheet within 48 hours to companies affected by the SVB events of up to 20% of their SVB deposits (limited to $5M).
  • Brex is offering emergency bridge loans to qualified SVB customers to help minimize the impact on operational spend.
  • Capchase is offering emergency payroll financing for SVB affected startups.
  • North Wall Capital are working on a solution to provide companies with deposits stuck at SVB with liquidity by either buying their claim, or lending against it.
  • Tranch is offering credit lines on operational spend up to $500k to pay supplier invoices.
  • Nitra is providing expedited underwriting for new credit lines and  bridge loans outside healthcare – up to $200k on card, more on bridge.
  • Arc is offering short term credit facilities and bridging loans (up to $250k or current cash position)
  • Recur Club has setup a dedicated $15million in line of credit for India-based founders impacted by SVB with 48-hours revert and no further equity dilution.
  • Founderpath is offering emergency payroll financing of $250K to $500K for B2B SaaS business with $1million and more in accounts receivable.
  • RazorpayX is for start-ups in India with exposure to SVB in the US. They are offering a working capital line of credit of up to $120K.
  • GetVantage is offering up to $150K non-dilutive capital in less than 48 hours

14. Consider asking customers to prepay for a discount. If your financial forecasts continue to deteriorate, you could also implement discounts for prepayments from customers – this may help boost liquidity in your business.

For startups with investments and money in an SVB bank account, your planning assumption should be that you never see your capital investment again. Assume that your $250k FDIC payout and whatever you manage to secure as an investor bridge, along with what you have in non SVB sources is the last money your business has, and build out a plan around that.

If you are unsure about what to do, seek advice from a financial expert who can offer sound guidance on the best course of action for your specific situation. At Fusion CPA, we are offering cash flow forecast sessions to help you develop a crisis management strategy alongside our experts. Get in contact with us.

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