This article appeared on ThisIsMoney.co.uk and features comment from Flagstone’s Founder and Managing Partner, Andrew Thatcher.
SMEs are missing out on at least £40 million a year in interest payments by leaving cash sitting in dusty old bank accounts. This amount could be raised if just 10 per cent of the money deposited by small and medium-sized businesses in UK bank accounts was moved into more competitive versions offering just 0.25 per cent more interest. This is the finding of research from Flagstone Investment Management, which runs a ‘cash management platform’ for SMEs.
Rather than leave money to rot in a single bank account earning a measly rate of interest, the platform can boost returns by switching cash on deposit between accounts. The service is not for everyone. It is reserved for businesses and high net worth individuals who have a minimum deposit of £250,000, and fees start at 0.3 per cent. This drops to 0.15 per cent but only for deposits of £10million or more.
However, Andrew Thatcher, founder and managing director of Flagstone, says all SMEs could potentially benefit from paying more attention to their bank accounts. Although, he understands the challenges they face in doing so. ‘The reality is that, unlike larger businesses who have the resource to proactively and professionally manage their cash, SMEs are unable to constantly be opening bank accounts, researching bank risk and moving money around,’ he says. At this time of year, the public are often urged to switch their current account to find a better deal. But the same is not true among the business community. The sums of money involved are usually far greater, but, as Thatcher explains, small businesses often don’t know how to find the best deal – or simply feel like they don’t have enough time to.
The problem is the cost of inertia adds up – to the tune of £161billion of SME deposits earning next to no interest in a dusty old account, according to Bacs Payment Schemes, which runs the UK’s Current Account Switch Service. In December last year, of the 72,890 bank account moves completed using the Current Account Switch Service, less than 3 per cent were done by a small business or charity. Of the £161billion SME cash deposits, as at the end of September, £93.1billion was held in current accounts, while £68.2billion was held in businesses’ current and savings accounts. That’s a lot of money mostly making little to no return.
Anne Pieckielon from Bacs Payment Schemes, says: ‘It makes sense for small businesses to check periodically whether or not the banking provider they have is still right for them; it may be that it is but, if it isn’t, it’s very easy to switch.’ She adds: ‘Another one of the hurdles for businesses making that change used to be the uncertainty around when the switch would actually take place. ‘With the Current Account Switch Service, businesses can choose the date they want and be confident that the move will happen on that day.’
Which accounts can give SMEs the highest return?
Santander Start-up Business Current Account – 0.25 per cent (if your business is in its first year of trading)
Saving Accounts – Easy Access
ICICI Bank Business Savings Account – 1.5 per cent (with a minimum investment of £1)
State Bank of India Instant Savings Account – 1.5 per cent (on a minimum account balance of £10,000)
One-year fixed-rate business accounts
Aldermore 1 Year Business Savings Account – 1.9 per cent (with a minimum investment of £1,000)
Shawbrook 1 year business fixed – 1.5 per cent (with a minimum investment of £5,000)
Aside from a higher interest rate, some business accounts can work harder for you in other ways.
Free business banking
Many business bank accounts try to tempt in switchers with an introductory period of free banking.
Time-wise, Yorkshire Bank tops the table with 25 months free (as long as your business has a turnover of less than £2million), before reverting to its competitive standard business tariff, which costs £5 per month.
However, although these headline offers may prompt you to make the initial switch, it is definitely worth checking that the account is right for you in general, and that the cost of banking doesn’t shoot up when the promotional offer is over.
Another perk is a fee-free overdraft – RBS will let customers apply for one worth £500 as part of its Start-up Package, plus a fee-free credit card too.
HSBC offers a host of resources to help new businesses find their feet, including a Knowledge Centre with quizzes to help you understand your business, as well as articles and expert views.
Lloyds Bank will give you access to its Business ToolBox free for 30 days, which offers a range of online tools including legal, expenses and accounting software.
Customers also have free access to its Business KnowledgeBox, a free online collection of guides and factsheets.
HOW FLAGSTONE’S CASH MANAGEMENT PLATFORM WORKS
One way in which SMEs can potentially get a higher return is through using a cash management platform. This will spread their deposit across different accounts and a range of providers to try to increase the interest earned.
The plus side of using a cash management system is that it does the hard work for you, seeking out the best deals across the market, and moving your cash accordingly.
For companies with a significant cash buffer, it is also arguably a more secure way to bank as the Financial Services Compensation Scheme covers £75,000 per account in the event of a UK provider going bust. If you hold less than this in each account, all of your returns will be protected.
Flagstone Investment Management, which launched its cash management platform a little under a year ago, has pre-existing agreements with the banks, so is able to offer clients a broad range of accounts across product type and currencies.
It claims that ‘in the majority of cases’ clients can increase their yield by as much as five times, net of fees. A typical client could have their deposit divided across 10 bank accounts, receiving an average combined interest rate of 1 per cent after fees.
The downside is that businesses need to have a £250,000 deposit or more to use the service, and the fee applied by the service will eat into the interest that you do make.
At Flagstone, clients are charged 0.3 per cent of their deposit per year for accounts of £250,000 or more, dropping to a 0.15 per cent fee for accounts over £10million.
Customers also have to select the level of risk they wish to take. Sometimes smaller ‘challenger’ banks will offer a higher return but will be accompanied by a slightly greater risk of default, which businesses should be aware of before they agree to place a deposit with them.
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