Bank Marketing Practical Cases - [Bank Marketing Practical Treasury.4]

Author: Dai Dansheng
Publisher:
Publish Date: 2006-09-01
Features: The Secret to Controlling Risk
The key to making a successful business out of this "buy low, sell high" trade lies in how to avoid and control risk. "We are operating in a very high-risk field, and the most important principle of risk avoidance is to always know what you are doing. The network we have formed with venture capital has provided us with extensive information support to understand the risks," said John Dean.
When determining whether a startup is worth providing credit services to, Silicon Valley Bank conducts thorough investigations through various means. First, it conducts detailed due diligence on the management team. Second, it talks with venture capital firms that have already invested in the company. Additionally, it calls the company's financial institutions and legal advisors to learn about the company's history and performance. At the same time, the bank matches the loan with the company's cash flow to review its monthly financial usage.
To reduce risk, Silicon Valley Bank requires that its clients be companies supported by venture capital. Furthermore, Silicon Valley Bank signs agreements with clients, demanding that patents be used as collateral. According to the agreement, if the company cannot repay the loan, its patents will belong to the bank. If the company struggles to stay afloat, the proceeds from the sale of patents must first be used to repay Silicon Valley Bank's loan before any funds are distributed to venture capital firms. This agreement forces venture capital firms to cooperate with Silicon Valley Bank.
During the DotCOM boom, Silicon Valley Bank rejected many loan requests from B2B and B2C companies because they lacked intellectual property to offer as collateral. In contrast, two other financial institutions that provided similar services to Silicon Valley Bank—Comdisco and VentureLeasing—suffered huge losses when many of their B2B and B2C clients went bankrupt. Comdisco even faced the brink of bankruptcy and was eventually acquired by General Electric.
In terms of collateral, Silicon Valley Bank's measures are also flexible. Patent technology is primarily used as collateral for companies in the research and development stage. After the product enters the market, the company will have accounts receivable, which can replace intellectual property as collateral. At the same time, the bank sets a maximum loan limit of $50 million.
In the past century, 97.5% of bank failures in the U.S. were due to loan losses. Over the past 20 years, Silicon Valley Bank's annual loss rate has been less than 1%.