- There are ways you can get access to your funds, regardless of the circumstances.
- Having multiple bank accounts has some advantages – but it comes with disadvantages, too.
- There are secure options that can help you navigate the complexities of managing liquidity risk without the need to open more than two bank accounts.
- You need to be set up with the right liquidity products in both your primary and backup (or secondary) banks.
Working with startups over several decades has given us a front row seat to the dynamics of the innovation economy and the excitement, challenges and investments that come with building and operating a startup. We offer our experience and partnership in all facets of financial management, including a popular approach gaining traction in 2023: managing relationships and accounts at multiple banks, referred to as a ‘multi-bank stack’ approach. As with any business decision, there are pros and cons to this approach, which can be addressed with insight and planning.
The ‘multi-bank stack’ approach
Maintaining deposit accounts at multiple banks can offer the feeling of assurance that your business has an extra layer of protection so you can continue to operate with no impediments to liquidity, regardless of the circumstances. This may be an effective strategy, yet managing multiple banks may quickly become a daunting, costly, and time-consuming task, especially for startups.
- Multiple accounts can offer peace of mind
- Deposit insurance up to $250,000 per institution
- Multiple bank accounts are an investment of time
- Multiple statements
- Multiple Know Your Customer (KYC) submissions
- Multiple banking relationships and calls
- Multiple bank accounts can be an investment of money
- Additional account management fees
- Higher costs of credit products
- Lower yield investments based on smaller balances across multiple banks
Managing multiple banking relationships may be an inefficient use of your time.
Considerations for the ‘multi-bank stack’ approach
Right-size your bank stack
If you are asking yourself, “how can I be assured that I will always have access to my money?”, your primary instinct might be to open an account at another bank, perhaps even multiple banks. Having two banks may make sense, but having five may add unanticipated overhead. To simplify, most companies can address their needs with a primary and a secondary bank alone.
Seek out banking products offering additional deposit protection
There are banking products available that directly address liquidity risk concerns, and you can get them from one bank. SVB, for example, provides ways to increase the safety of funds on existing or new accounts, such as Cash Sweep and IntraFi Cash Sweep (ICS). Both are described below. These services can help alleviate concerns you might have about the safety of your funds without needing to open multiple accounts at different banks.
Strategies and products based on your financial needs
Cash Sweep enables you to invest cash from your deposit account into a variety of AAA-rated and professionally managed Money Market Funds (MMF). Essentially, any excess funds are ‘swept’ daily from SVB’s balance sheet into government-backed investments and are therefore not at risk. The funds are safe but are unlikely to be easily or continuously available in case of a bank closure.
Each day, the amount of cash to be invested is determined by comparing the end-of-day collected balance to a pre-determined target balance. Funds are then debited from the deposit account to the MMF or credited to the deposit account from the MMF that night.
With ICS, you can easily deposit funds to multiple accounts at multiple banks, all with FDIC protection. Your funds are sent from your transaction account to deposit accounts at other ICS-network banks in amounts below the standard FDIC insurance maximum of $250,000. This means that all deposits remain fully eligible for FDIC protection. Using ICS, you have complete access to all funds, transaction histories, and reports from multiple institutions while working directly with just one bank.
The main point is that you have access to your funds even during a bank failure.
Partnering with SVB
With SVB as your primary bank, you can use either of the Cash Sweep or ICS options and other important banking products, such as working capital, credit solutions, and commercial cards. Your secondary bank can provide sufficient diversification, holding two to three months of runway to help ensure liquidity through any type of disruption. In the event of a bank closing, this strategy also works well since the FDIC makes qualified insurance payments within a few days and usually the next business day.
While a multi-bank stack strategy can be a viable alternative for startups seeking peace of mind in the event of a disruption, it is very likely to be substantially more expensive and inefficient to manage liquidity across multiple banks. You’ll want to have a solid understanding of the concerns you are addressing. Since there are attractive alternatives, you may want to evaluate which approach meets your needs in a streamlined, operationally-efficient, and lower cost manner.
Your SVB Relationship Manager can help guide you in addressing your financial needs with the right banking products to help manage your risks and your business opportunities at the same time.