Two Reasons Why Banks Require Cash Deposits from Startups (2024)

Two Reasons Why Banks Require Cash Deposits from Startups (1)

Why do banks require their customers to keep their cash at their specific bank after they have received a loan? This question came up a lot from startups who took out loans from Silicon Valley Bank and were then required to keep their cash deposits there with them. Startups should be aware of this practice when taking out loans from banks.

Taking out a loan

So, for example, when a startup takes out a venture debt loan from a bank, one of the main things in the loan agreement is that you have to keep that cash at that bank. Silicon Valley Bank was in the news a lot, but many other banks have the same policy. In fact, this policy isn’t exclusive to startup loans – a real estate developer that’s getting a loan to build a shopping center will probably have that requirement in their term sheet.

Usually there is a little bit of flexibility regarding how much cash must be kept there. Instead of the whole deposit, the compulsory amount could go down to 90% or 80% of the cash deposit, but the main thing is that the vast majority of deposits have to be kept at the bank that made the loan to you.

Why do banks require you to keep your deposits there?

There are a couple of reasons that banks, such as SVB, require their borrowers to keep the cash deposit with them:

Risk mitigation

The first reason for this is because it acts as a risk mitigation tool. By keeping the deposit, or the majority of the deposit, at the bank that has lent the money, that bank then knows that they can monitor your cash. They are able to see how you’re spending it and what you’re doing with the money. This is very important to them as they have what’s called ‘the right of offset’.

The right to offset is a tool for risk mitigation. It can be used in the case of something going wrong at a company they have lent money to and that company goes into default. In this circ*mstance, the bank then has the ability to offset the loan with the cash deposits they have held with them.

Now, they don’t do that very lightly, but offsetting is the ultimate risk control mechanism.

The right of offset brings the startup at default back to the bargaining table. It gives them the opportunity to ‘play nicely’ and raise more money, restructure or sell the company - in order to pay back the loan.

Banks need deposits to make other loans

The second reason banks require you keep the deposit with them is down to how banks work in general. That is, banks need these deposits in their accounts to continue to make other loans.

When a bank gives a loan to a startup and they then receive $10-$20 million in deposits from that startup, they will recycle those deposits into more loans. This is how banks make money. If a startup were to take that cash away from the bank that lent it to them, that isn’t going to be very helpful for the bank at all.

So there you have the two core reasons why so many companies had so many deposits at SVB or some of the other regional banks. They were required to.

Post-crisis at Silicon Valley Bank

Here at Kruze Consulting, we work closely with Silicon Valley Bank and clients who are associated with them. Interestingly, what we have seen post-crisis is Silicon Valley Bank’s willingness to go down to as low as 50% of the cash deposit that is required to be kept at the bank. This flexibility has been very nice for our clients for whom we’ve been negotiating.

We don’t have as clear an idea about other banks and what they are currently offering, but bringing down the required deposit percentage is certainly a helpful thing to do for companies, in case of another crisis.

If you have any questions on loan deposits, Silicon Valley Bank, valuations, credit cards, startup investing, startup accounting, taxes, or venture capital, please contact us. You can also follow our YouTube channel and our blog for additional information on accounting, finance, HR, and taxes for startups!

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Two Reasons Why Banks Require Cash Deposits from Startups (2024)


Two Reasons Why Banks Require Cash Deposits from Startups? ›

The first reason for this is because it acts as a risk mitigation tool. By keeping the deposit, or the majority of the deposit, at the bank that has lent the money, that bank then knows that they can monitor your cash. They are able to see how you're spending it and what you're doing with the money.

Why do banks ask about cash deposits? ›

By keeping a close eye on large deposits, the IRS and FinCEN can analyze suspicious or fraudulent activity. Another name for the Bank Secrecy Act (BSA) is the Currency and Foreign Transactions Reporting Act.

What are two reasons that people deposit money into banks? ›

Why? Because putting your money in an FDIC-insured bank account can offer you financial safety, easy access to your funds, savings from check-cashing fees, and overall financial peace of mind.

What are the two benefits of deposits with the banks? ›

  • People can make money by depositing money into banks, which also pay interest.
  • People's money is safe with banks.
  • It is easy for individuals with savings and current bank accounts to easily get credit.
  • Credit is required for low-income producers.

What are two reasons to put money in a bank? ›

Your money will be protected from theft and fires. Plus, your money will be federally insured so if your bank or credit union closes, you will get your money back. The maximum amount of money that can be insured is $100,000. Many banks offer an interest rate when you put your money in a savings account.

What cash deposits are banks required to report? ›

Depositing a big amount of cash that is $10,000 or more means your bank or credit union will report it to the federal government. The $10,000 threshold was created as part of the Bank Secrecy Act, passed by Congress in 1970, and adjusted with the Patriot Act in 2002.

What do banks consider cash deposits? ›

Cash deposits are money you transfer into your bank account. Cash deposits can include cash, checks and money transfers. You can do a cash deposit through a bank teller, at an ATM, or via mobile app. If you deposit $10,000 or more in cash, your bank will report the amount to the IRS.

Why cash deposits? ›

Depositing funds into your Savings Account is an essential step towards building savings securely. Besides bank transfers and depositing cheques, deposits in the form of cash are another way to increase your bank balance. Rather than keeping cash stored at home, depositing it into your savings account is prudent.

Why do banks not like cash deposits? ›

For instance, large brick-and-mortar bank Wells Fargo states in its deposit account agreement that non-account owners are not allowed to deposit cash into consumer accounts. From a bank's standpoint, prohibiting cash deposits can help prevent money laundering and fraud. It's also expensive for the bank to process cash.

What are the advantages of depositing money in a commercial bank? ›

A commercial bank is an easy and flexible source of accepting and withdrawing money. These are the economical source of funds as it manages deposits and withdrawals at a low cost and involves no hidden cost. It generally provides the loan against some security.

What are bank deposits and what are its benefits? ›

Bank deposits are the primary means by which people store their money, mainly in savings accounts, checking accounts, and money market accounts. Bank deposits are a way to safely keep money with the ability to access it at any time in a conveniently.

What are the advantages and disadvantages of deposits? ›

Limited Access to Funds: While deposit accounts offer liquidity, there might be restrictions on the number of withdrawals or transactions allowed. Interest Rate Fluctuations: Fixed interest rates on certain deposit accounts may not keep pace with inflation or changing market rates.

What are 3 reasons to put your money in a bank? ›

Let's look at a few reasons why everyone could benefit from a bank account.
  • Bank accounts are FDIC insured. ...
  • Bank accounts pay interest. ...
  • Bank accounts help you save money. ...
  • Bank accounts can help you get other financial services. ...
  • Bank accounts give you convenience. ...
  • Bottom line.
Apr 4, 2024

What are 3 benefits advantages of saving your money at a bank? ›

Saving at a bank helps you manage your finances in a more organized and planned manner. Having a savings account lets you separate funds used for daily needs from savings funds. You can also check your savings funds' incoming and outgoing flows through neatly recorded transaction history or account mutations.

What are the two main purposes of money? ›

Money functions as a medium of exchange, allowing individuals to trade goods and services with one another. It also serves as a store of value, allowing people to save wealth over time. Lastly, it functions as a unit of value, enabling people to compare the worth of different items.

How much cash can you deposit in the bank without being questioned? ›

Banks must report cash deposits of more than $10,000 to the federal government. The deposit-reporting requirement is designed to combat money laundering and terrorism. Companies and other businesses generally must file an IRS Form 8300 for bank deposits exceeding $10,000.

Do banks ask questions if you deposit cash? ›

The main reason banks ask where your money has come from, is because they are required to verify this as part of the law that has been put in place to try to stop money laundering. By asking you the details of where the money has come from, they can verify that it has been generated through legitimate means.

Do banks get suspicious of cash deposits? ›

In the United States, when individuals or businesses deposit $10,000 or more in cash with a bank or financial institution, it triggers a mandatory report to the Financial Crimes Enforcement Network (FinCEN), as mandated by the Bank Secrecy Act.

Do banks care if you deposit cash? ›

But the deposit will be reported if you're depositing a large chunk of cash totaling over $10,000. When banks receive cash deposits of more than $10,000, they're required to report it by electronically filing a Currency Transaction Report (CTR).

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