How insolvency practitioners can assist tech companies
Businesses in all kinds of industries can face sudden and crippling issues with their short-term capital, and the tech sector is no exception.
Whether it’s the fault of the company itself, a supplier, or a source of cash, there is any number of links in the chain that can fail.
The recent collapse of the Silicon Valley Bank has demonstrated just how dire things can turn in the space of only 24 hours, leaving tech companies lost for what to do about their failing liquidity.
In circumstances like those, insolvency practitioners can lend a hand.
What is liquidity?
Liquidity, in simple terms, is the ability of a company to meet its short-term obligations with its existing assets, and how easily those assets can be turned into cash.
This differs from solvency, which is more concerned with the business’s long-term ability to sustain itself financially. An otherwise solvent business can have low liquidity, which can quickly compound as short-term liabilities like payroll and supplier invoices mount up.
Accordingly, companies that fail to shore up their liquidity can collapse in a short space of time and end up bankrupt.
Something that can knock out the good liquidity of an otherwise healthy business is when their best source of cash—such as their bank—suddenly collapses.
Why did Silicon Valley Bank collapse?
A combination of factors contributed to the overall failure of the bank, some feeding into others. Unfavourable speculation caused a ‘bank run’, wherein many customers withdraw their money in a short space of time, leaving the bank unable to answer the sudden spike in demand.
This is ultimately what caused the bank to collapse. Usually, the normal rhythm of withdrawals and deposits would allow the bank to balance its supply and demand.
When investors and customers are worried that the bank will collapse, they can create a kind of self-fulfilling prophecy by then withdrawing all of their savings and causing said collapse.
Though different in context and specific causes, the run on Northern Rock seen on the UK high street in 2007 is a good example of how banks can quickly collapse through fear-driven depositor withdrawals.
Why does this affect tech companies so badly?
As its name implies, Silicon Valley Bank served many of the tech companies situated in and around California’s Silicon Valley region. Many businesses in the tech sector have made Silicon Valley their base, including some of the world’s biggest like Apple and Meta.
The impact that the bank’s collapse has had on its dependants is twofold.
First, the collapse left many tech companies in liquidity crises of their own, with many wondering how they were going to pay their staff at the end of the month. This is a problem for any company, but for start-ups and those on even more volatile financial grounds, the threat was even greater.
Second, Silicon Valley Bank’s failure doesn’t just have ramifications for existing tech companies, but also those who might have been hoping to get its help in future. Tech companies—particularly start-ups—can struggle to find funding from conventional banks due to the high-risk perceptions that those banks have of them.
This is understandable in the case of start-ups, given their incredibly high rate of failure. Silicon Valley Bank was structured in a way that made its concentrated customer base of tech companies manageable and profitable.
In the wake of its collapse, it’s unclear what will take the bank’s place and what options will be available to other tech companies hoping to get off the ground and establish themselves.
How can insolvency practitioners help tech companies?
When your liquidity or solvency is threatened and you’re left wondering how you’re going to avoid spiralling debt, options can feel limited if not non-existent—but this is rarely the case.
Even when things seem their most dire, business turnarounds are possible and can be achieved with the right responsiveness and guidance.
Additionally, things may not be as bad as they first appear for your business. It can be the case that a simple voluntary arrangement could help navigate your company out of debt, or that you need some help understanding your intangible assets as well as the cash that you can glean from other tangible assets.
What we’re saying is: don’t give up yet.
If your company is affected by the turbulent conditions faced by the tech sector, get in touch with Irwin Insolvency to receive expert and impartial insolvency advice.
Contact us today to learn more and tell us your story.