Currently, there is over £164bn in small and mid-sized enterprise cash deposits in the UK, according to the latest figures from the British Bankers’ Association (BBA) – but what should businesses be doing to make the most of the funds?
In this low interest rate environment, many SMEs are unaware that better rates are available for the taking
The data revealed that the amount of cash businesses are holding has increased by seven per cent in the last year – up from £161bn in Q3 2015, £157bn in Q2 2015 and £151.6bn in Q1 2015.
While the fact that businesses have more cash in their bank accounts than they did a year ago can generally be seen as a positive, when you consider that 86 per cent of them are banking with one of the big four – Barclays, RBS (including NatWest), Lloyds, and HSBC – which are currently paying zero per cent interest on business deposits, the picture looks a lot more bleak.
So what can you do to ensure that your money starts working a bit harder for you?
The general public are often urged to switch their bank current account and shop around to find a better deal, but the same can’t be said for the business community.
In fact the big four have lost just one per cent of market share in the business current account market since 2012, and seven in ten businesses have not switched their provider in more than ten years.
In December last year, 72,890 bank account switches were completed using the Current Account Switch Service – small businesses accounted for less than three per cent of this.
So why is it that so many businesses are unwilling to move? In this low interest rate environment, many are unaware that better rates are available for the taking, or simply don’t have the time or resource to constantly be opening bank accounts, researching bank risk and moving money around like larger businesses do.
As a result, their cash languishes in bank accounts offering little or no return and they continue to lose hundreds of millions of pounds in interest each year.
In fact, our research shows that if businesses did shop around and take advantage of the more attractive rates on the market, they could have made almost £1bn in interest last year, compared to the £24m they actually made.
This is because challenger banks such as Aldermore are currently paying interest rates as high as 1.1 per cent for their instant access account, whilst the likes of Cambridge and Counties Bank are offering 1.8 per cent AER for their 120 days’ notice account.
If you’re not quite sure about switching to a challenger bank – even though the majority of them offer FSCS protection – or are looking for a provider with a strong credit rating with all the main agencies (A-1 with S&P, P-1 with Moodys and A with Fitch), Nationwide Building Society could be a good option for you.
It’s currently offering a great rate for SME corporates – 1.20 per cent for 45 days’ notice monies (up to a max of £5m) – which should be hugely attractive to any business with excess capital that it wants to be able to access in the reasonably short term.
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Spread your risk
A lot of businesses may be unaware that sums of cash over £75,000 aren’t protected by the Financial Services Compensation Scheme (FSCS) so for those with sums over this amount, leaving all of their cash holdings in just one bank account doesn’t only mean they’re likely to be making less interest on it, they’re also carrying more risk.
Many of our clients therefore spread their cash across several accounts which diversifies the risk and in the majority of cases, leads to between two-five times higher returns per annum.
If an interest rate for one of the accounts they’re currently depositing with suddenly drops, or indeed the interest rate for one they’re not currently banking with increases, we notify them and they can request that we re-allocate their cash to ensure it’s optimally arranged.
So whether it’s thinking outside the box and looking to challenger banks, broadening your search of the high street and more established banks, or using cash management solutions, just be assured that better interest rates are there for the taking and you can make more from your money.
The financial market has changed and so has Real Business – we’ll be demonstrating that on Wednesday 18 May at The FD Surgery, our all-new event that will provide the cure to those minor niggles and major headaches plaguing the industry.
Andrew Thatcher is founder and managing partner of Flagstone Investment Management, the cash management platform