Where do you propose a company with millions in cash keep that money if not a bank?
In all seriousness, you don't want small and mid-sized companies having to think about managing their cash. They have better things to be doing.
I managed cash flow of my business through 2008. I worked through the recessions in the 90s and 2000s. When I was young, I worked for an employer who had seen banks fail in the Great Depression. He taught me not to trust a single bank. Nobody should.
Yeah, it would be nice if we had a well regulated financial system.
Anybody with more than $5 million in the bank should have someone dedicated to managing that money. If you don’t, then you’re not running a business properly. Startups like to skimp on important things like that and they shouldn’t. Any CFO with basic skills should be doing or arranging this depending on the size of the company. That’s literally their job.
It’s simply poor money management by the employer to assume you can toss $1M-$5M in a business checking account and have zero risk. It’s not a personal account and it is clearly over the FDIC limits.
Anyone with $250K net worth knows there is risk here. Even my 80+ mother who is NOT finance savvy knows about this $250k limit and manages her life savings in different money market accounts to limit her exposure.
Corporations have always split their cash into cash and "almost-cash-equivalent" liquid assets (like Treasury Bills). E.g. one can read any random 10-k corporate filing and there will be a line item for short term assets like "T-bills" because companies like to earn interest on their excess cash. The corporate treasurer is responsible for managing that mix.
But a company still needs working cash in the bank account for payroll and to pay vendors. The smaller startups may have not have enough excess cash to bother with splitting some of it into T-bills.
I also don't understand this. Why can't the working cash be a loan from the bank secured on the T-Bills? Then the depositor bears essentially no risk because they have no net balance with the bank. Essentially, why can't companies' working cash be overdraft? That way it's the bank that bears the risk rather than the companies. That's the whole point of the bank!
I guess one downside is that the bank will apply higher funding charges for that kind of arrangement. Well, the depositors should suck it up. You have to pay a price for resilience.
I guess there are other fine points of corporate finance that I have yet to grasp, but I'm learning a lot from the comments on HN. Thanks for your reply.
Loans create deposits, not the other way.
In fact the problem of the US banking system in the last years has been that deposits have been increasing much faster than loans.
In relative terms yes, in absolute terms, they'd be lower.
> the problem of the US banking system in the last years has been that deposits have been increasing much faster than loans
Yes, it seems to be. "Too much money chasing too few returns", as they say.
Not really. The Loan-to-Deposit ratio is usually lower than one so if both double that means that deposits grow more than loans in absolute terms.
But banks have more deposits than loans even now. Because they need to get money from somewhere.
(Honest question, I'm curious.)
As far as I can see the banking system in aggregate has more deposits than loans:
https://www.federalreserve.gov/releases/h8/current/default.h...
The original question I was trying to answer was "If everyone gets cash from loans, who'll be the depositors putting cash in the bank to be loaned?". I just don't think that question is well-posed. A bank creating a loan requires new cash deposits of only R x loan_amount, where R is the reserve requirement. For making payroll this ought to be almost nothing.
Ok. That would be reserves. But it's not like some deposits are backed and others are not (leaving aside the existence of different kinds of deposits) - what you have is a total amount of deposits and a total amount of reserves.
But notice that it's not in the bank's interest to provide them or push them if they do. They would rather you trust them and provide them the cheap float.
Perhaps some near-fraudulent collusion between SVB, VCs and the executives of the banked startups then ...
Less so the executives, who probably did largely as their investors advise. Their individual business probably isn't that important on its own.
It's the VC partner who sees to it that 10 portfolio companies a year drop their capital raise into cheap deposits who really mattered.
the issue is that startup founders might have a lot of implied wealth based on the equity they hold and money raised but a "mainstream" bank is going to look at that equity, assess it as non-liquid and highly speculative and reject any loan applications
svb was more likely to extend personal loans to startup founders because -- in theory at least -- they better understood startup finance and they were incentivized to provide good service to prospective customers of their more business focused activities
I owe vendor $100k. I transfer $100k of T-bills. They are paid cash equivalent, no?
The obvious thing that comes to mind is I am guessing there is some lockup of those t-bills maturing? Wouldn't this make sense for the Fed (Or some government entity) to be the broker+last resort to allow conversion of t-bill to someone else at a cost of breaking the term?
Even though the t-bill itself would still exist until maturity on the Fed's side and now company A is able to always guarantee payment transfer.
(EDIT - see replies below for why it is not)
T-Bills are different than T-Bonds. T-Bills mature in weeks up to 1 year (4, 8, 13, 26, 52 week terms). They're a good way to assign your money you can't risk (like next month's payroll) while still earning interest on it and having access to it when you need it.
Every payday I come down and they shell it out and put it in my hand.
Then a disgruntled but genius employee comes up with a crazy heist scheme and I get caught in the middle of it getting my pay one payday.