This article first appeared in the Financial Times | By: Andrew Bounds, Enterprise Editor, Financial Times
Cash-rich small UK businesses are starting to turn the tables on banks by putting their deposits up for auction.
Small and medium-sized businesses are holding on to ever more cash but interest rates are at historic lows. Last year, SMEs’ cash holdings rose 7 per cent to £164bn, the British Bankers’ Association said this month.
Flagstone Investment Management, a financial services software business, has launched a “reverse auction” system for banks to bid for these deposits.
Andrew Thatcher, Flagstone’s managing partner, said the cash holdings of small businesses were “languishing” in accounts earning almost nothing. One company was able to increase the interest it earned from zero to 0.95 per cent when the system was trialled, he claimed.
He cited one entrepreneur who sold his business and had £55m in cash. “He was offered 0.25 per cent, which he felt was derisory. He came to us and within 72 hours we had opened eight accounts with three-month deposit terms.” Subtracting Flagstone’s fee of up to 0.15 per cent, he received almost 1 percentage point more in interest.
Flagstone has £1bn of clients’ cash under management and deals with more than 20 banks, including Shawbrook, Barclays, Metro Bank, SG Hambros and Investec. It is regulated by the Financial Conduct Authority and carries out due diligence and customer checks on all clients, reducing banks’ paperwork.
“We don’t charge banks. Therefore we reduce their cost of funding,” said Mr Thatcher. “They get a large deposit without marketing costs.”
SMEs were hoarding cash as they are “battening down the hatches and preparing for the storm”, said David Postings, chief executive of Bibby Financial Services, an invoice-finance company. In a survey of investment intentions, it found that a majority of companies expected flat or declining sales and a worsening economic picture. Mr Postings said they were also reluctant to borrow because of the memory of the 2008-09 crash when banks pulled finance almost overnight.
Mr Postings, who once worked for Barclays, said banks often need to match deposits to liabilities and so were sometimes prepared to pay more. “The rate at 5pm might be different to what it is at 9am.”
Air Partner, a listed air services business that charters private jets and buys and sells aircraft, is one early user of the system.
The £200m turnover business had £1m and €1.5m in cash deposits with RBS earning no interest.
Neil Morris, the finance director, said: “We are cash-rich. In the days before the banking crisis it was easy to get decent rates but some banks now charge you to hold euros.”
Using Flagstone, the business was able to get 0.95 per cent on the £1m from Santander and 0.5 per cent on the €1.5m from Close Brothers on a rolling 30-day deposit.
“Instead of shopping around you have it all there … and you get rates you would not get anywhere else,” he said.
Mr Thatcher said: “This is not a replacement for a day-to-day bank account. It is a tool for excess capital on balance sheet.”