Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
1, The first is to avoid exceeding the Federal Deposit Insurance Corp. insurance limit of $250,000. If you get to that level, open an account at another bank.
2, Ensure your values are in line with your bank. If you can’t find information you are seeking via talking with your banker or checking its website, you should question your banking relationship.
3, Utilize operating lines of credit to mitigate the need to keep cash on hand exceeding $250,000.
4, The risk of a dispute rises during challenging economic times, so ensure you have in place strong documentation memorializing contracts, agreements and understandings with business partners.
Hearing about bank failures, a potential destabilization of certain segments of the banking industry and a possible broader destabilization of the economy can be very unnerving for business owners. Risk mitigation is always important and challenging, but it becomes exponentially more so when entering a volatile and uncertain economic landscape brought on by other unprecedented events.
However, in at least one regard, this budding banking crisis merely brings to light a risk that has been hidden in plain sight all along — that your bank might fail, causing a loss of funds that you assumed were safe.
As scary as this sounds, it is not a cause for panic, just reflection and careful planning. A comprehensive plan should address both first-order effects (i.e. what happens if your bank fails) and second-order effects (i.e. what happens if a banking crisis creates general economic instability or adversely affects customers, business affiliates or debtors of your business).
There are three main ways to mitigate the direct risk to your business associated with a bank you work with failing.
The first is to avoid exceeding the Federal Deposit Insurance Corp. (FDIC) insurance limit — $250,000 — at any one bank. If you have one account at one bank the analysis is simple — does the account exceed $250,000? If no, it is all insured. If yes, then it is insured only up to $250,000. Things get more complicated with multiple different accounts at the same bank, but the following general rules of thumb apply:
If you are currently exceeding FDIC limits at a single bank, the easiest way to deal with the situation is to open a bank account at a new bank (or banks) and transfer funds to the new bank in an amount such that there is not more than $250,000 at any one bank.
The second way to mitigate the risk is to vet your current bank to ensure alignment with your values, philosophies and risk preferences. A banking relationship is a business relationship like any other and you need to know who you are dealing with and feel confident that they will be a strong business partner for many years to come. This information can be obtained through talking with your banker and visiting the bank’s website. If you are not able to get satisfactory answers to your questions from these sources, that lack of information itself speaks volumes.
The third way to mitigate risk is to utilize operating lines of credit to reduce the need for cash on hand that exceeds $250,000. All businesses need access to sufficient operating capital and a number of businesses will choose to keep an amount on hand in excess of $250,000 to meet their operating needs. Instead, those businesses should consider reducing cash reserves to an amount under $250,000 and then utilizing short-term lines of credit to bridge the gap between making payables and collecting receivables.
By switching to short-term operating lines, many businesses will be able to reduce working capital to such a level that the operating account remains within FDIC limits.
Second order effects of a potential banking crisis are those associated with general economic instability and adverse effects to customers, business affiliates or debtors of your business arising from that economic instability. The best way to deal with these effects for many businesses is to focus on documentation and decisiveness.
“Documentation” refers to properly memorializing contracts, agreements and understandings between your business and its customers, suppliers and business associates. In good times, it may not matter whether contracts are tight, accurately reflect a true course of dealing and give adequate protection to your business, because there may be a low likelihood that a dispute will arise. In troubled and uncertain times, this risk of a dispute arising may increase exponentially, so the importance of having appropriate contracts in place likewise increases exponentially.
A related concept is “security.” Security is what a business takes as collateral to ensure payment or performance by a party that owes that business money. Security is taken through the execution of a statutorily compliant security agreement. The corresponding security interest then needs to be “perfected” through the filing of a Uniform Commercial Code (UCC) financing statement. A business should consider taking and perfecting a security interest in the assets of a debtor any time the risk of non-payment is a significant issue.
“Decisiveness” refers to addressing defaults or other problems with business affiliates swiftly enough that those problems do not result in tangible harm to your business. This can mean something as simple as moving to a different supplier when an existing one is showing signs of instability or restructuring an existing contract with a struggling business affiliate.
This can also mean something more drastic, such as bringing a lawsuit or collection action against a business affiliate who is in default expeditiously enough that the lawsuit or collection action can be completed, or a settlement can be reached, prior to the affiliate’s insolvency or bankruptcy.
