How SVB collapse will affect corporate earnings (and other spillover effects)

The Silicon Valley Bank collapse was frightening because it impacted people’s access to liquidity. For a period of a few days, depositors had no idea whether or not they’d be able to access their funding to pay for mission critical expenses like payroll. Thankfully, on Sunday night the FDIC, Fed, and Treasury collectively announced that depositors’ funds would be made whole and as of publication, it looks like money is going in and out. To the general public, it might look like we're back to business as usual.

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Not so fast. Many CFOs now must deal with the consequences that the collapse has had on their companies. We can talk all day about startup financing, lines of credit, deposit risk, and asset-liability-mismatch, but in this article I’m going to focus on an issue that's been less discussed and a bit more idiosyncratic: the impact that the SVB shutdown will have on financial reporting—and specifically Q1 2023 corporate earnings. 

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What happened to Silicon Valley Bank’s payment rails?

With the massive disruption to bill pay and accounts payable (AP) rails this weekend, particularly for vendors who banked with SVB, many vendors and suppliers scrambled to switch out payment accounts and bank accounts. For instance, between the start of the crisis on March 9th and March 13th (and continuing to today), the Ramp Finance team received dozens of emails from vendors basically saying some combination of the following:

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• “We bank with SVB but we do not know if we can receive funds. Please stop paying us for the time being.”
• “Let us come back to you within the next few days with alternative banking and funding instructions.”
• “Please in this critical time, be aware of phishing attempts, and verify that you are actually paying who you’re supposed to be paying.”

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These vendors ranged from mission-critical software, to discretionary vendors, contractors, and even a number of publicly traded companies. With how wide-ranging the banking capabilities of SVB reached, it would not be surprising if many companies’ finance teams similarly received dozens, if not hundreds, of similar vendor messages. 

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Unclear Q1 corporate earnings will lead to investor uncertainty

Our team reacted swiftly. We are currently processing these requests as quickly as we can to ensure we’re sending payments to the right bank accounts for these vendors. But updating payment instructions, and especially lifting debit blocks on bank accounts can be a quite manual and onerous process (and especially for folks who have just set up new accounts in recent days).

Why does this matter? Well, the timing could not be worse for some of these vendors that are also publicly traded companies. Some companies may take days or weeks to set up new accounts and lift debit blocks. Some of these processes could easily take us until after March 31. If that’s the case, then inevitable delays in collections and cash flow recognition of outstanding customer payments are going to massively impact companies' quarterly earnings and reported cash flow. Depending on when a company’s specific corporate quarter ends (let’s assume most are on the March 31 cycle), the Q1 earning report could be incredibly noisy and create a lot of uncertainty for investors and shareholders.

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Imagine if you’re an equity analyst trying to model free cash flow but literally none of your seasonality adjustments or year-over-year adjustments make sense. The March report could be a big aberration for many companies, and potentially greatly impact corporate analysis for many quarters to come. 

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What are some other spillover effects?

• It may be the case that even vendors who don’t bank with SVB could be impacted. Many CFO purchasing decisions will likely get pushed out. Quarter end is when companies—especially those that are sales-led, software driven—have most of their bookings for the quarter. But I think it’s safe to assume many finance teams are distracted with managing existing vendors and bringing their AP rails back online. Software or services contracts that might have gone through before the quarter closed during a “normal quarter” may have gotten stalled this past week.
• In a similar vein, companies and finance teams who are going through their annual audits are going to feel much more pressure than in a normal year. Audit timelines most likely will also get pushed out. It is customary for companies to have a few months after calendar or fiscal year-end to conduct a third-party financial audit (which Ramp has done many times in the past). This is about the time when most of that analysis comes to fruition and when audit workloads are heaviest. But who’s focused on that if folks are worried about making payroll? Time is at a premium and teams are likely feeling stretched. 

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In a later article, we’ll spend more time discussing the potential spillover effects of the SVB collapse on the funding environment, credit extension, and cost of capital for startup and growth-stage businesses.

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