SVB Fallout: A Sharp Reminder About the Importance of Working Capital

The recent news about Silicon Valley Bank (SVB), Signature Bank, Credit Suisse and other financial institutions offers a couple important lessons for businesses, even ones that weren’t directly impacted by those high-profile crises. The situation serves as a reminder about the importance of working capital, the lifeblood for most businesses. 

Like water or air to humans, many companies do not appreciate how important day-to-day funding is — until it’s suddenly unavailable and their operations are put at risk. According to C2FO’s most recent Working Capital Survey, about one-fifth of surveyed businesses said they didn’t have access to enough liquidity to run their businesses for a year. The median small business has enough funding to cover only 27 days of outflows if its inflows dried up, JPMorgan Chase found. About 25% of small businesses have enough for only 13 “cash buffer days.” 

This should be a moment of clarity for the business community. We need to learn from SVB and other failures, and ensure that we have more robust fallback solutions in the case of our partner’s failures. Or we risk our own survival.

Lesson 1: No more single points of failure — businesses need a more flexible and diverse set of financial tools

In a challenging environment, preserving optionality — having more than one way to do things — could be the difference between a company’s survival and closing. Silicon Valley Bank represented an outsized threat because it concentrated so much risk from one key sector (deposits from like-minded, venture-backed technology and life science startups) in a single point of potential failure. In the same way, businesses raise their risk if they rely solely on one source for working capital, like their bank. Companies should be looking for multiple outlets for accessing extra cash flow when necessary and developing relationships with other funding sources to ensure continuity in a pinch. 

At C2FO, we’ve tried to solve this issue by creating a suite of solutions that work for businesses in multiple situations. Unlike traditional financial partners:

• We think of suppliers as our North Star. We know that modern financial products have to meet the real, day-to-day needs of small and midsize businesses. If those products don’t meet those needs, suppliers will continue to face problems with working capital — and won’t be able to achieve their own goals.

• We make it easy, always. A traditional lender can take multiple weeks to consider a loan request, and you may be required to sign a large stack of documents. Our products are designed to put money into users’ accounts within a few days at most — a critical capability if the business needs funding ASAP.

• We provide unparalleled flexibility for greater control. In most relationships between enterprises and their suppliers, the enterprises have almost unquestioned say over payment terms and discount sizes. Our products, meanwhile, let suppliers opt in (or out) of any discount arrangement when they decide. They also have the ability to set the size of a potential discount, which the enterprise can then accept or reject.

• We’re debt-free for suppliers. C2FO’s Early Payment solutions are not debt or factoring. Suppliers are receiving early payment for goods or services they’ve already delivered. They’re not required to take on debt or give up equity to receive more funding.

Lesson 2: The business community underestimates the importance of working capital

Silicon Valley Bank reminded us that if you don’t have cash — or ready access to cash — to meet your ongoing financial obligations, such as inventory, rent and other needs, then you may no longer have a business. That’s why we immediately saw stories across multiple media outlets, highlighting startups’ worst fears about the sudden collapse of SVB. They didn’t know how they were going to pay their employees. 

Unfortunately, our long-standing financial system makes it unreasonably difficult for diverse, smaller and younger businesses to access working capital when they need it. When they need funding, they’re usually directed to traditional lenders, whose standards are so inflexible that many otherwise healthy, growing businesses fail to secure loans or lines of credit. 

Only a little over half of employer firms applying for loans, lines of credit or cash advances received the full amount of funding they requested, according to the most recent Small Business Credit Survey from the US Federal Reserve. The survey found 21% were denied completely.

If traditional lending isn’t an option, those businesses often turn to a dizzying array of traditional factors and online lenders that will provide capital, but on terms that are often more expensive and generally less clear than they should be. 

We need a financial system that is capable of creating solutions that are better than what we have lived with for decades, without adopting the worst habits of other new tools. These new solutions will require innovative approaches, more integrated data and systems, and capital willing to think differently about how to provide businesses in inefficient markets the capital they need to thrive.

For example, what if we pursued novel sources of data to improve the data available to de-risk a transaction or lending situation? Or measure the quality of the company’s leadership? At C2FO, we’re using proprietary data sources to improve our Capital Finance program, and it’s allowed us to extend funding to a larger and more diverse group of companies. 

Or what if we could find a way to remove risk from the equation entirely? C2FO’s Early Payment solution lets suppliers of any size receive payment on their accounts receivable as they deem fit and get paid weeks or months early, in exchange for granting their customers a small discount. Risk isn’t a part of the exchange because suppliers are receiving money they have already earned. The buyer has already signaled they will pay the invoices, so it isn’t taking material new risk either — in fact, it’s generating a controlled rate of return.

As an industry, the financial system not only needs to develop new, data-driven solutions, it needs to scale them as well, so that every company that needs working capital can access it on equitable, convenient terms. If nothing changes, we’ll only be hurting the next generation of companies, stifling their growth and putting the larger economy at risk.

The bottom line on working capital’s importance

Businesses should rethink how they approach working capital. If your traditional lender was unexpectedly unavailable, where would you go to find the funding to keep your operations up and running? The time to ask these questions is now, before the next crisis arrives. Smart organizations will invest in tools and solutions that increase optionality and flexibility. The stakes — and the potential benefits — are too big not to get it right.  

Chris Atkins is C2FO’s president of capital finance and capital markets.