How to manage cash as a US based company, who are raising $3m to $10m.
Read the article written by Mandeep Arora, Partner in Nordic Eye.
Recommendations for managing cash
This article is written for US based companies, who are raising $3 to $10 Million. Below that threshold you may take some concepts but this is likely too complex. If you are raising more than $10 Million you may want to look at more advanced strategies including a treasury ladder approach if you have an experienced CFO on your team.
THE FOCUS & THE TENSION
The aim for your management team should not be on maximizing yield but on minimizing risk. As a founder you must navigate the tension between choosing a bank that minimizes your risk and maximizes your service. It would be simple to just tell everyone to bank with JP Morgan Chase due to their scale (and other factors) but in reality Chase may not bank your company and is unlikely to provide you with the type of service you need.
Have a primary and secondary bank where you store 90 days worth of cash
This enables the company to take advantage of FDIC insurance at multiple institutions which will provide you $250k insurance per institution. More importantly this allows for rapid movement of funds from one bank to the other if needed in an emergency. In total, these accounts should have at least 90 days of cash available. You may want to have a static $250k in your secondary bank while keeping 90 days cash at your primary bank. If your operating cash is far in excess of $500k you may want to see if an insured cash sweep account is an option. Ensure that, if possible, your accounts are linked and that your team has some practice moving funds between the two accounts.
LONGER TERM FUNDS
There are a number of ways to keep longer term funds secure:
- Insured cash sweep accounts – These accounts are insured to much higher limits. Note that the word insured here is the key word and you need to ask your provider about the limits of said insurance and how the insurance is obtained.
- Services that spread your funds – Services like Mercury Vault increase your insurance by spreading your funds across a network of banks while giving you a single interface.
- Treasuries – If you have a CFO who can manage this, short term US treasuries are an incredibly safe way to store your funds. You only want to use short term treasuries to avoid interest rate risk. You may store a portion in 90 day treasuries, and another chunk in 6 month treasuries.**
You can store these longer term funds with a Money Center Bank*, or with a partner of your primary / secondary bank. For example, many banks allow for purchases of treasuries but these accounts are actually held and managed by BNY Pershing.
*Money Center Banks are banks that access liquidity primarily through money markets instead of customer deposits. Examples of Money Center Banks are JP Morgan Chase, Bank of America, Wells Fargo and Citibank. Note that these four banks also offer the benefit of scale, tighter regulations and being “too big to fail” meaning it is unlikely the government would allow one of these firms to collapse.
- Sometimes a bank will push you to keep all deposits with one bank. Just point them to the SVB collapse and they should back off of this demand.
- **Why are treasuries secure? Even if a bank defaults the treasuries function as a contract between your firm and the US government. The bank facilitates this transaction but the agreement is with the government and will be honored unless the US government defaults in which case.. we’re all probably in big trouble anyway. You need to double check this is true, however, by asking your bank / brokerage partner if your funds are directly invested and asking for clarity about the custody of those assets.
- Money market accounts are a good way to earn yield on cash with very little risk. During the 2008 crisis money market accounts did actually lose money – however the drop was small at about 2% and was temporary. Note that money market accounts are insured like a normal account up to $250k. There are also Money Market Funds which are securities and may offer more protection but you need to investigate the funds insurance
- Canadian banks have historically been very stable, and are subject to tighter/different regulations than US banks. Citi National Bank is owned by the Royal Bank of Canada and has a very good reputation. Having a Canadian bank as part of your mix can add risk diversification to your holdings.
If you are a Nordic Eye portfolio company do not hesitate to reach out with questions. If we don’t have the answers we will help you find someone that does.
Partner, NordicEye Venture Capital
March 20, 2023