Why businesses need to diversify their credit and funding sources
Many businesses will now realise that proactively future-proofing against financial risks is the only way forward.
"As a result of the SVB crash, startups will 'evolve' how they interact with money," Hristo Borisov, CEO of Payhawk, says. "The majority of tech companies are now likely to add other bank accounts, credit cards and so on to their financial stack; and also diversify their supplier, vendors and critical business infrastructure, in order to reduce over-reliance on any one particular provider."
It's clearly more important than ever for businesses to better diversify their credit and funding sources to navigate any banking and lending market challenges. But that's not all. Diversifying credit sources can also support businesses to do the following:
- Mitigate risk: By diversifying credit options, businesses can spread their risk across multiple sources of financing, rather than relying on a single source. This reduces the risk of a single lender or source of credit failing or becoming unavailable, which could cause significant problems for the business.
- Get access to better rates and terms: Diversifying credit options allows businesses to shop around for the best rates and terms for their financing needs. This can result in lower interest rates and fees, which can save the business money over time.
- Achieve more flexibility: Different types of credit options may have different repayment terms, payment schedules, and other features that can provide businesses with greater flexibility to manage their cash flow and meet their financing needs.
- Meet different business needs: Different types of credit options may be better suited for different financing needs. For example, a short-term loan may be better for a business that needs to cover temporary cash flow gaps, while a long-term loan may be more appropriate for a business that needs to finance a major expansion project.
- Build credit history: Diversifying credit options can help businesses build a diverse credit history, which can improve their credit score and make it easier to obtain financing in the future.
"This time around, tech startups were left only with an unpleasant scar from the SVB demise. But the funny thing about history is that it often repeats itself. Hopefully, everyone is now aware that diversification and contingency plans are not something trivial and could be a life-saving tool," Konstantin Dzhengozov, CFO at Payhawk, says. "One of our debit card customers immediately reached out to diversify with a credit line, saying he realised how important it is to diversify and that he plans to use the Payhawk credit card to manage his SaaS subscription spend and take the pressure off payroll."
Overall, diversifying credit options can help businesses manage risk, access better rates and terms, increase flexibility, meet different financing needs, and build a stronger credit history.
How to mitigate single-thread risk
Of the five topics above, mitigating risk is number one for a very good reason. Businesses can’t afford to put all their eggs in one basket especially in the current economic climate.
Businesses should leverage multiple sources to manage their risk better and spread risk across various providers. By using multiple sources of credit, companies can spread their risk and avoid relying too heavily on a single source of financing. This reduces the risk of the business being impacted if a single lender fails or becomes unavailable.
Thanks to our investors, Sprints and QED Investors, for their invaluable insights in producing this article. You can find more expert insights from QED Investors in their blog, Ten implications for fintech of the SVB collapse.
“When companies are single-threaded with one financial institution, it’s often because of loan deals or preferential covenants. Do not agree to be bound in this way. Ensure you have multiple bank accounts and spread your exposure across a number of institutions. Know that you have a way to move cash and securities around if you need to.” — QED Investors
If a business relies too heavily on a single type of financing, such as relying solely on a line of credit, it could also be vulnerable to interest rate changes or other risks. Diversifying credit options can help the business reduce concentration risk by spreading its financing needs across different types of credit.
Businesses can also manage seasonal and cyclical cash flow by diversifying their credit options. For example, a company that experiences a seasonal drop in sales may be able to use a short-term loan to cover its expenses until sales pick up again.
QED Investors suggest that one way businesses can mitigate risk is by opening and maintaining the following accounts:
- Pay your people and your leases from an operating account
- Pay loans from a funding account (if you're a credit-granting institution). And keep this account in a different institution from your operating account
- Keep your excess cash invested in short-term treasuries in a direct cash account or in a third-party managed money market account, like Goldman Sachs, Morgan Stanley, or J.P. Morgan as broker-dealers for securities; J.P. Morgan or Bank of America for money centers; and Fifth Third for regional banks. (You should also keep at least three months’ payroll in this account as an ‘insurance premium’ to help you navigate any potential crises)
“Ensure your institutions are of different types and test that you can move money across all your financial institutions. For banks that have complicated payment structures, make sure you test your backup facilities. Don’t do it for the first time in a crisis.” — QED Investors
By diversifying credit options, businesses can reduce their risk exposure and increase their ability to manage various financing needs and scenarios.
Things your CFO must do
All organisations and industries face challenges, and your company's CFO (maybe you?) will likely play a big part in steering your business through choppy waters more than once.
Great CFOs and finance teams will have proactively prepared for uncertain times and won't be caught off guard. Here are some examples of the actions they should take.
Deep dive into your counterparty risks and employ good governance
- Review your counterparty risks at least once a year, not only at contract signing
- Ensure you do your due diligence when signing contracts and partnering with external organisations and regularly review their stability
- Create a governance structure with key points to ensure that your business always asks the right questions
- Design a board-approved policy for wires. For example, the CFO and CEO can agree to sign anything under $2 million. Plus, get board approval (via a designated individual) for anything over
- Set a policy around cash management and how much should be readily available vs. invested in things like short-term treasuries
- Stay as liquid as possible rather than chasing extra yield. "Don't take long duration risk," but build rules around it instead
- Solicit advice and expertise from your board and investors. Voria Fattahi, Partner at Sprints, explains “I believe it is the responsibility of investors and boards of businesses to see to it, through the implementation of the right governance and internal controls, that businesses can limit the business impact of challenges like the SVB scenario, and just as importantly to have the processes in place to know how to act decisively if such scenarios were to materialise.”
Run reviews and have backups
Make sure your business knows who has access to accounts and information. And how you and other named parties will access funds in case banking systems become unavailable. Don't let one person become "the single point of failure."
“Register and map where you have risks and categorise and grade by impact, likelihood, and velocity (the rate at which a risk can impact a business). For each top risk identified, managers should implement and follow up on the actions pertaining to it, identify potential risk indicators that could be used to monitor it, and assign owners for accountability purposes. In this way, the Board of Directors / Audit Committee and management are able to obtain increased insight into, and oversight of, the risks the business is facing, and you can promote accountability across the organisation,” suggests Voria Fattahi, Partner at Sprints.
Run quarterly financial reviews with your board and ensure that you can fully demonstrate how your business is spending its money. Consider spend management solutions like Payhawk to get real-time cash flow visibility.
“Create a list of authorised instruments, with limits, that cash can be sitting in, for example, T-bills of differing durations or Money Market Funds backed by treasuries. Have policies and procedures in place around how they deal with excess cash flows and how you manage sweep accounts.” - QED Investors
Diversify your funding sources
Back to diversification, but it's a biggy. And, the Big Banks stopped being the only players in town since the birth of Open Banking.
As detailed in Fintechs and Big Banks: How financial innovation advances businesses and consumers, fintech businesses work in highly regulated sectors. Meaning they are held to as high a standard as any other financial institution, including the big banks. They must comply with the same specialist regulations as any other financial institution.
Businesses must think beyond traditional banks. "We live in a world where traditional banks are no longer the only option available to companies, and plenty of alternative solutions can help you build your diversification strategy," Konstantin Dzhengozov explains. "As a rule of thumb, companies should aim to achieve no more than 30-40% exposure to a single solution provider."
Diversifying your funds with Payhawk
At Payhawk, our corporate Visa cards offer coverage in more than 32 countries with options for Euros, Pound Sterling, and Dollars. You can use our cards physically and virtually and upload them to Google Pay and Apple Pay.
Our company credit cards are part of a complete spend management solution that gives you expense management, card controls, accounts payable, multi-entity management, and reimbursements all in one place. Moreover, our solution can save your business more than two hours of work daily, reduce manual data entry by 80%, and support a faster month-end close.
We also support the vital agility, and real-time spend visibility businesses of all sizes need.
"Before Payhawk, we used two different credit card systems, one from Barclays and one from AMEX. With the Barclays card, you would get a monthly statement, and you had to pay it in seven days. But sometimes, when we'd log into the system to retrieve the statement, it wasn't even available," Uchenna, Finance Manager at MDM Props, said. "So, we didn't know what we were paying, which was bad for cash flow. We had to download a pdf statement then physically get the receipts and attach them to the statement, and it would take days or even weeks to reconcile."
Plus, our solution's OCR (data capture) reviews and pulls out receipt and invoice data in over 60 languages. And our ERP integrations (built per the accrual accounting concept) ensure that all of your data is synced seamlessly. No more manual entry, rekey errors, or lengthy reconciliations.
With Payhawk, for example, your cardholders can simply spend with the card (within the business' set rules), take a photo of the receipt, and upload it to the Payhawk app. Once added, they can choose a category as pre-defined by their finance team and add a few words of supporting info. The finance team can then see the spend in real-time and get a proper understanding of the business' cash flow and overall health.
Talk to us about credit cards and spend management
Payhawk credit cards include:
- All of the spend management features detailed above and more
- Credit limits of up to £250,000, based on assessment
- 30-60 days of interest-free credit on purchases (with no personal guarantee required)
- Zero interest rates
- A flat 1.99% FX fee on transactions
Looking to diversify your funding sources and reap the benefits of bulk card controls, expense management, and more? Book a demo to find out how Payhawk could help your business.