Updated March 14, 2023 to reflect continuing developments
Companies with funds at Silicon Valley Bank were relieved to find out on Sunday night that the government is stepping in to guarantee their deposits. But for some of these businesses, an important question remains: What will happen to the debt they borrowed from the failed bank?
Until Monday evening, the funds were unavailable for startups and other borrowers that had not drawn down the loans. The FDIC-controlled bank then announced that it’s resuming access to existing loans and is proceeding to approve new ones.
In the meantime, borrowers face the risk of violating loan covenants if they withdraw deposits from their SVB accounts.
These factors are making companies that rely on SVB loans nervous.
John Markell, a managing partner at venture debt advisory firm Armentum Partners, said that a number of clients have started to look for refinancing options with another loan provider.
While there is a high likelihood that the SVB loan portfolio will be bought, the timing of a sale is uncertain. A buyer for the bank’s equity didn’t materialize over the weekend, but another auction is reportedly underway. Some industry participants are now expecting that the bank’s assets will eventually be sold piecemeal.
SVB was a heavyweight in the venture debt industry, lending $6.7 billion to startups in 2022. But not all borrowers have an urgency to access that capital immediately.
“Our companies are going through the various phases: moving money out of SVB, setting up various bank accounts, ensuring payroll is getting done,” said a VC who asked to remain anonymous. “We haven’t gotten to the debt part yet.”
Healy Jones, vice president of financial strategy at early-stage startup accounting firm Kruze Consulting, said companies with revolver lines of credit at SVB may be the most impacted from not having access to the facilities.
“Some of these startups use revolvers to smooth out inventory purchases and timing on customer payments,” Jones said.
SVB offered startups loans at relatively low rates, but the terms of that debt required companies to keep deposits with the now-defunct bank. With the future of those loans unclear, many businesses are continuing to pull cash out of their SVB accounts.
Nicholas Freund, founder and CEO of data analytics startup Workstream, which has a debt facility with SVB, said that while he has not pulled cash out, many companies in a similar situation are taking their deposits elsewhere.
It is unclear whether the ultimate buyer will honor the loans, keeping all the terms intact. Startups that pulled cash from SVB may find themselves in breach of the loan agreement, which could further complicate negotiations with a would-be buyer.
The companies that Markell is advising don’t feel comfortable with the uncertainty.
“They would rather start along a path where they have control versus one where they don’t,” Markell said.
Rosie Bradbury contributed reporting.
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