Cash is king, and this mantra is especially true in a tough economic climate. A strong cash flow helps businesses procure materials, pay vendors on time and maintain a quality work force. Operational success ultimately comes down to the availability of cash. Companies that have it are healthy even in bad times.
A private banker who understands your financial profile — business accounts, personal loans, retirement plans, investments — can recommend and offer tools to help you generate cash flow.
“In this time, a banker that acts as your true business partner should always be looking for additional ways to help your company ‘find’ money,” says Joe Verduci, assistant vice president and retail banking manager at Brentwood Bank. “It’s important to establish a relationship with a private banker that can work as a quarterback and handle all of your banking needs. That way, you can work together toward meeting all of your financial goals, and the banker can identify products to help you achieve your objectives.”
Smart Business spoke with Verduci about cash-generating banking tools and strategies to maintain a healthy bank account in recessionary times.
How do you address business owners’ concerns about FDIC insurance?
The simplest way to insure your full deposit is to work with a bank that participates in the Certificate of Deposit Account Registry Service (CDARS). This program includes more than 2,500 U.S. financial institutions that essentially coordinate their FDIC insurance coverage and act like a co-op.
For instance, if you need an additional $100,000 worth of coverage, the CDARS program at the bank will obtain a certificate of deposit (CD) from another participating financial institution. The money remains at your bank, but the bank essentially ‘borrows’ insurance from another CDARS institution to protect your funds. Through this program, companies (and individuals) can insure up to $50 million.
There are a limited number of Pittsburgh banks that participate in CDARS, so it’s wise to ask your banker about the program to be sure that all of your deposits are protected.
Make sure your bank can obtain the insurance necessary for your total deposit.
Are there other CDARS products that can protect a business’s cash?
One of business owners’ main concerns about opening a CD with operating funds is availability of cash. A 90-day CD can be a long-term commitment for a business that must meet payroll and maintain quick access to its funds. Fortunately, there are attractive alternatives available. For instance, a four-week CDARS CD allows businesses to earn interest on money until they need the funds. The short-term CD provides the flexibility business owners need and offers a return on their investments.
How do sweep programs work, and how can businesses bolster their cash flow this way?
Sweep programs are flexible money market accounts that earn interest and are linked to a zero-interest operating account. Businesses that currently keep their operating dollars in a zero-interest account where it sits waiting for payables to be distributed or large bills to be paid do not earn money on those deposits. By tying that account to a money market that earns interest with a sweep function, deposits literally ‘sweep’ back and forth between accounts with no penalty. The business earns interest on its deposits until it uses the funds. The money automatically transfers to the checking account when the business needs to make a payment. For instance, I know a business client that ‘found’ $1,000 a month in interest that he wasn’t previously earning from his zero-interest checking account. The money market sweep program allows him to earn money on funds and still access cash when he needs it.
How can a business line of credit help earn businesses money if used conservatively?
There are often opportunities to earn discounts with vendors that offer flexible payment terms. For instance, when a vendor offers a 10 percent discount if payment is received within 10 days, a business can take advantage of that discount and use its line of credit to save money. If it does not run a balance on the line of credit, a business can save money by paying vendors with favorable terms and sidestep fees that build up when a credit line is extended for a long period of time. Before using this ‘savings’ method, discuss the strategy with your banker.
Speaking of cash flow, are banks still lending to businesses?
Absolutely. Banks that maintained a conservative lending philosophy and did not get involved in risky subprime lending are, for the most part, still lending to businesses. In fact, extending loans to sound business customers is critical to banks’ financial health. It’s a two-way street. This is where building a relationship with a private banker who understands your business and personal financial needs will go a long way toward securing your future. Discuss your financial ‘big picture’ with a banker who has your best interests in mind, and he or she will guide you toward cash-earning programs and solutions to improve your business’s viability.
JOE VERDUCI is assistant vice president and retail banking manager of Brentwood Bank. Reach him at email@example.com or (412) 409-9100 x307.