Five Short-Term Recommendations in Response to the Current Banking Crisis
- Mar 12, 2023
By Robert Katz
Update as of March 12, 2023, at 8:00 PM EST: In a joint statement from the U.S. Department of Treasury and FDIC, department leaders announced that depositors of both Silicon Valley Bank and Signature Bank will have access to all their funds on Monday, March 13, 2023. It was also stated that no losses will be borne by American taxpayers. Though, shareholders and certain unsecured debtholders will not be protected.
On Friday, March 10, 2023, the Federal Deposit Insurance Corporation (FDIC) shut down Silicon Valley Bank (SVB), an institution that many venture capitalists and start-ups relied on as a foundation for their support, existence, and growth. It was done on a Friday, most likely so the regulators would have ample lead time to plan and regroup while banks and markets are closed over the weekend.
Now with a plethora of pundits coming out of the woodwork, sounding like the most painful Monday morning quarterbacks, it’s important that business leaders understand how to react as well as mitigate future risk, especially if you currently have deposits or a line of credit with SVB.
Here are five short-term recommendations (within the next 30 days) to forge a path forward, clearly manage uncertainties and pressures, and pave a path to potential recovery.
- Preserve Your Cash
Yes, it sounds obvious, but it is still the most critical first step and worth saying! When there’s a likelihood, or even a fear, that there may be little access to short-term liquidity, having access to cash is more important than ever. During the previous financial crisis, CIT Group, among others, went through a similar process, though the recovery is likely to be painstakingly slow.
Here's a few strategies businesses can take to preserve cash:
- Consider calling vendors to negotiate short-term credit extensions (the worst they can do is say no).
- Request company owners and C-suite to defer compensation for a week or more. This not only keeps crucial cash on hand, but when the company or stakeholders ask this, you can really see who is committed to the business’s mission, and who isn’t. Paraphrasing Warren Buffet, when the tide goes out, you can see who is wearing shorts.
- Consider strategically stretching out certain other trade vendors. Unfortunately, some of this may have to be done involuntarily.
- Understand the Ins and Outs of Your Loan or Line of Credit
One of the guidelines discussed elsewhere is that if the Company has an active loan or outstanding line of credit with SVB to continue making payments. Consider significant consultations with the company’s attorney or counsel on this matter before proceeding. As mentioned earlier, preserving every dollar of cash and creditability in the short term will lay the foundation for the future.
As painful, arduous and time consuming as it may be, begin proactively searching for a new lender. Ask your network, including your Board of Directors, for introductions and recommendations. Nothing is better than a warm or hot lead.
Additionally, VC-backed companies may consider reaching out to their investors about the possibility of providing some level of short-term liquidity until the funds in SVB can be obtained.
- Conduct a Liquidity and Cash Flow Forecast
A comprehensive liquidity or cash flow forecast allows business leaders to gain a clear understanding of the organizational cash flow over the next one to two months.
If the company has significant deposits or a line of credit it can no longer access, assume the worst—that funds will be inaccessible for a month or two, even potentially longer. The most you can do is to plan for the worst, hope for the best. This helps create additional clarity around your financial picture, as well as highlight where the imminent pressure points -- and strengths -- are for the related time frame.
- Communicate with Key Stakeholders, Especially Employees
Being proactive, particularly during times of uncertainty, is paramount for any business leader. Taking control, managing the situation and trying to calm fears is critical. Especially if this is something new and/or if the company has not previously experienced this type of crisis.
Understand both internal and external stakeholders read the same things we do. Addressing the issue head on, while it may be a difficult conversation, allows them to hear it from the source and not speculate on their own. It also builds confidence that leadership is at the forefront and not just waiting to react. During crisis times visibility is key in addressing stakeholders’ concerns.
Additionally, having a clear and consistent dialog with employees on the situation is key to navigating a situation like this. Your people are your most important asset. Stress levels were already high before this event, so it’s paramount that as a leader, you can deliver messages on the situation openly and often. For instance, be clear about the situation to all employees, even if you are fortunate enough to not have exposure to SVB, you don’t want anyone making incorrect assumptions based on what they’re seeing externally.
- Don’t be Afraid to Ask for Help
It’s impossible to tell what comes next in a situation like this, so make sure you’re staying informed on SVB and its developments this week. Read the papers, connect online, and digest different viewpoints on the situation. For example, Roku, a digital television streaming service, has over $400 million of deposits tied up in SVB.
Finally, understand you are not alone in this, and success rarely occurs on an island. No matter your exposure, reacting quickly (and being proactive) are crucial. Call on your advisors as a resource for questions and strategies to navigate this in the short and long term.
The best case is that it is resolved early in the week of March 12, 2023, but given past experience, it’s impossible to predict. Considering the five steps above will provide you with tools, strategies, and framework to address the crisis SVB caused, as well as be proactive for the future.
Accepting the painful and “unfairness” of reality, executing on remediation and coordinating and communicating with your most important constituencies places you in the best position for recovery.
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Robert D. Katz
Robert Katz CPA is a Managing Director of EisnerAmper Financial Advisory Services Group, and works with public and private companies, in and out of bankruptcy, to create and execute the strategy needed to restructure or improve operating performance.
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