5 Tips for Safeguarding Business Assets

November 23, 2024

Safeguarding cash deposits is a major concern for business owners, even more so recently. The collapse of the Silicon Valley Bank also calls into question the trust in European banking institutions.

“Although we were not directly affected by SVB, I learned that we need to spread our cash across several banks. Just in case we don’t have access for some reason, IT problems at the bank, etc. Which bank do you use/can you recommend?”

— Founder of a tech startup

This sentiment is currently the status quo. We have summarised five specific ways to increase the security of deposits with banks and minimise financial risks.

Spreading deposits across accounts at multiple banks

It is advisable to spread deposits across several bank accounts and institutions to be protected during a banking crisis or bankruptcy. In Germany, the deposit guarantee scheme safeguards bank customers’ deposits. The statutory deposit insurance covers deposits of up to 100,000 euros per customer and per bank. This deposit insurance is mandatory for all banks.

Consider distributing deposits among additional national and international institutions if liquidity reserves are high. In principle, spreading company assets over at least two institutions is advisable. Such diversification can significantly reduce the risk of bank runs, IT problems or liquidity blocks, as happened, for example, in the case of the HSH Nordbank’s difficulties in 2015.

Choosing the right banks

When choosing a bank for business deposits, several factors must be considered to protect assets.

Choose systemically important banks: Systemically important banks enjoy an implicit government guarantee due to systemic risk. The government will bail out the bank in a crisis to ensure the financial system’s stability. An example of this is the French BNP Paribas.
Look for credit scores: It is advisable to invest money with financially stable banks in economically stable countries. Rating agencies such as Moody’s, Fitch and S&P can help assess banks’ creditworthiness from the highest credit rating (AAA) to speculative and unsafe investments (BBB-/Baa3). The bank’s credit rating is an essential indicator of the bank’s safety.

What are Systemically Important Financial Institutions?

Systemically Important Financial Institutions (SIFIs) are considered “too big to fail” due to their size, importance for the financial system’s stability, and interconnectedness with other banks. The insolvency of these institutions could trigger a chain reaction that would destabilise the financial system as a whole.

Countries give implicit state guarantees for SIFIs during such collapses. In other words, States will rescue the banks in an emergency and thus stabilise the financial system.

In Germany, the so-called “Recovery and Resolution Act” (SAG) exists for this purpose. It provides that in the event of the insolvency of a systemically important bank, the government will attempt to restructure it. If this is not possible, the bank is wound up, whereby the statutory deposit guarantee protects the customers’ deposits.

However, it is also important to know here: The implicit state guarantee for SIFIs only partially guarantees customer deposits.

Distribute liquidity reserves correctly

Bank management and capital allocation for operations are closely linked. Founders and managers must balance their share of resources wisely: too much available liquidity can lead to lower returns and consolidation risk at a bank, while too little available liquidity increases the risk of liquidity shortages.

Therefore, ongoing analysis of operational cash flow is essential to determine how much is needed and when. Once the necessary reserves are known, the investment pool can be defined.

For companies with sufficient cash reserves, the typical recommendation is:

50% in short-term liquid assets such as call money or current accounts
30% in medium-term investments such as time deposits or bonds, and
20% in long-term investments such as funds.
Riskier investments such as shares are usually only used for more considerable assets.

For companies with limited liquidity reserves and high operating cash needs

70-100% in short-term funds such as call money or current accounts to pay off short-term (daily or weekly) expenses,
0-30% in medium-term and long-term investments to pay off monthly and longer-term (quarterly or annual) costs.

However, long-term expenses should not be neglected entirely, as it is crucial to cover long-term liabilities and plan for future growth and investments.

Increase security and maintain an overview with multi-banking

With multi-banking platforms, companies manage the assets of several bank accounts on one platform. This makes it easier to keep track of accounts at different banks and reduces the complexity of accessing them. By using a multi-banking solution, account balances and transaction histories can be quickly and clearly displayed. This increases the transparency of one’s finances, which can lead to better-informed decisions.

Similarly, multi-banking increases the security of handling total assets. By depositing capital with different banks, companies increase their deposit insurance and reduce systemic risks. The threat of a total loss at a single bank is minimised as only a piece of the deposits would be affected.

Consider money market funds for large deposits

Businesses with substantial deposits can also consider investing their money in what is known as “money market funds”. These funds invest in short-term, highly liquid and safe investments such as government bonds, term deposits or high-quality corporate bonds. The advantage: companies benefit from higher interest rates than with call money accounts without taking on too much risk.

For deposits over €10 million far exceeding insurance limits, money market funds can be a valuable addition to distributing cash reserves among different banks. Since these funds are broadly diversified and invest in safe assets, they minimise the risk of losses and, at the same time, offer a higher return vis-à-vis call money accounts. However, it is fundamental to remember that liquidity is more limited, and the invested capital may take a few days to be repaid.