Business Owner protects liquidity

October 15, 2020

How to Protect Your Liquidity

Companies that have adequate liquidity on their books have had an easier time than most in weathering the current economic crisis. But the uncertainty caused by the coronavirus pandemic means that it is crucial to secure — and even grow — that cash.

Companies are facing reduced yields on many of their liquidity products, including deposits, certificates of deposit (CDs), money market accounts and sweeps, said Rogger LaCruz, senior product manager at City National Bank.

And while making changes to your payables and receivables is a well-known way to influence your company's cash flow, there are other options for boosting your liquidity, earning higher yields and protecting your company's cash flow.

Here are three additional ways to secure your liquidity.

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Bank Deposit Sweep Programs

One solution that can be leveraged to manage liquidity is a bank deposit sweep program that safeguards your cash and offers a rate of return on excess funds, as well as additional eligibility for coverage under the Federal Deposit Insurance Corporation (FDIC), a government agency that insures deposits in U.S. financial institutions.

“Most all banks that are members of the FDIC offer up to $250,000 of FDIC coverage," said LaCruz. “But if you want FDIC coverage for $5 million, you need to go to 20 different banks. With our City National Bank Deposit Sweep program account, you can have up to $5 million covered by FDIC by enrolling in the sweep program that gives you extended FDIC coverage from participating program banks, just with City National."

Along with relieving a business owner from the daily burden of determining the company's cash position, the sweep account can keep extra cash working for the business at all times, automatically investing funds in excess of those needed to support daily activity.

Structured Deposit Products

Other unique programs available to protect liquidity and enhance yield in a low-interest environment include currency-linked CDs (CLCDs) and dual-currency investments (DCIs), said Bernard Tsui, global markets manager at City National Bank.

Both are short-term deposits, with typical terms shorter than six months, and both require a $250,000 minimum transaction by a business with at least $10 million in total assets or by an individual with at least $10 million in discretionary investments.

Both products are tied to currency movements, but the biggest difference is that CLCDs are principal-protected and FDIC- insured.

DCIs, on the other hand, include the possibility of conversion to another currency.

“DCI and CLCD are both structured products that combine a regular CD with a currency option to achieve the enhanced yield," said Tsui.

“DCI includes a sold currency option, while CLCD includes a purchased currency option. Since DCI's sold currency option gives rise to a possible currency conversion, one would expect to receive a higher rate of return from a DCI than a CLCD," he added.

Strong Relationships

Because liquidity issues are uniquely challenging in this environment, a proactive financial institution can be worth its weight in gold.

“In times of stress, cash is king, but for some early-stage and fast-growth companies, securing credit can be difficult even in good times," said Brent Causey, global head of supply chain finance at City National Bank. “It is important to work with a bank that can be creative and provide flexible options for capital beyond the traditional off-the-shelf solutions."

In addition to building or maintaining a strong relationship with a financial provider, it's important for companies to treat relationships with their customers and suppliers with care.

For instance, Causey recommends considering both sides of your supply chain ecosystem - customers and suppliers - holistically.

“In times of stress, it is important to be flexible. Small changes in pricing that keep your vendor in business, and in turn keep your business running smoothly, are a far smaller cost than having to halt manufacturing or pause customer service due to a supplier bankruptcy or bottleneck," he said.

Showing flexibility and loyalty to key suppliers and customers is critical — it may just help your business stay afloat long after the pandemic is over.

This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.

City National, its managed affiliates and subsidiaries, as a matter of policy, do not give tax, accounting, regulatory or legal advice. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. You should consult with your other advisors on the tax, accounting and legal implications of actions you may take based on any strategies presented, taking into account your own particular circumstances.

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