It is common practice among start-up founders to invest significant time and effort into crafting compelling financial models and presentations, aiming to impress potential investors. However, as investors delve deeper into understanding these companies, two additional critical issues often surface:

• Over-reliance on a single banking institution

• A lack of robust control procedures

Over-reliance on a single banking institution

The dependence on a single banking institution, as evidenced by the SVB crisis, highlights the dangers of concentrated risk exposure. When SVB encountered financial turmoil due to its heavy involvement in high-risk sectors such as technology start-ups and venture capital firms, clients who had entrusted all their assets to the bank faced significant repercussions. Frozen accounts, restricted access to funds, and uncertainty regarding deposit safety left customers vulnerable. In certain cases, despite companies having the option to transfer their funds out of SVB accounts, they lacked an alternative bank account for redirection.

Diversifying across multiple banks can help mitigate such risks and offer greater financial security, akin to purchasing insurance for the company.

Maintaining multiple bank accounts also empowers founders to strategically allocate funds for various purposes. They can designate specific accounts for FX transactions, daily operational needs, setting up templates for payroll or recurring payments to vendors, and for savings deposits. This approach not only streamlines financial management but also optimises interest rates, especially in environments where high interest rates prevail.

Diversifying company fundings across accounts from different banks enhances the company’s financial resilience and stability.

In recent years, the UK financial landscape has witnessed significant expansion, with a growing number of institutions, including popular financial technology companies, entering the market. These entities offer a diverse array of products such as FX exchange transactions and personal/business accounts. However, it’s important to note that not all financial institutions are covered by the Financial Services Compensation Scheme. This lack of coverage means that funds deposited with these institutions may not benefit from automatic protection in the event of insolvency.

Consequently, it is essential for businesses to invest time in researching reputable banks that best align with their specific needs and requirements. By doing so, they can safeguard their funds and mitigate potential risks associated with banking with institutions outside the compensation scheme’s coverage.

A lack of control procedures

Robust control procedures offer numerous advantages for businesses. By implementing proper controls, security concerns are mitigated. This structured approach minimizes the risk of unauthorized access to funds, bolstering trust and reliability in financial operations. Transparent and efficiently managed financial systems not only foster investor confidence but also support long-term growth by facilitating informed decision-making, efficient resource allocation, and adherence to regulatory requirements.

Robust control procedures thus serve as a cornerstone for sustainable business operations and fostering a conducive environment for growth and development. This also prepares the start-up companies to fulfil the potential audit requirements in the future when the company expands.

For start-ups seeking to implement control procedures, it’s crucial to begin by establishing foundational processes

• Firstly, considering a creation of a standardized workflow for handling payments could be a way to get started. This ensures consistency and clarity in the payment processing system.
• Secondly, understanding how the banking platform can facilitate segregation of duties in approving transactions is essential.

While incorporating multiple layers of authorisation for every transaction might not be practical for efficiency reasons… 

…developing clear transaction policies and collaborating with the bank’s relationship managers to optimise the banking platform can significantly strengthen control mechanisms.

Sample workflow for processing an invoice payment

Conclusion

Start-up founders must address the risks of over-reliance on a single banking institution and deficient control procedures. Diversifying across multiple banks and implementing transparent procedures are vital for safeguarding start-ups’ financial stability and fostering trust with investors. With a proper control framework, investor confidence and long-term growth could be maximized. 

This article was written by Clean Growth Funds Chief Financial Officer, Gemma Fong