Introduction
With higher interest rates in the UK, allocating your business’s operating and excess cash to a high-interest account can offer
multiple benefits:
1. Additional Source of Revenue
2. Reduce Your Effective Cost of Borrowing
3. Minimize Counterparty Risk
Small and Medium-Sized Enterprises (SMEs) typically focus on growing their business by maximising sales and managing day-to-day operations, often leaving little time to optimise the return on their cash reserves.
Allica Bank recently conducted a study which found that £149bn of cash is sitting in business current accounts earning 0% interest. , while the Bank of England Base Rate was 5.25% (as of June 2024).
consumer deposit rates have increased with the Bank of England Base Rate, business account deposit rates have remained low or at zero. This means SMEs are potentially leaving tens of thousands of pounds on the table by not considering solutions such as high-interest savings accounts or Money Market Funds, which offer potentially instant access and significantly higher interest rates on deposits.
Benefits for Businesses
Benefit 1: Higher Returns
Allocating your cash to high-interest accounts can contribute to business profits and positive cashflow. For example, a typical business holding an average cash balance of £300,000 could potentially earn up to £15,750 in interest per annum (assuming a 5.25% interest on deposit). Investing in opportunities with returns lower than the Bank of England Base Rate (5.25% as of June 2024) may not be as beneficial as placing cash in a high-interest account.
Benefit 2: Reduce the Effective Cost of Borrowing
Businesses rely on various sources of funding to help manage cashflow and expand operations, such as overdraft facilities, bank loans, or other short-term funding solutions. The rise in interest rates from a historical low of 0.5% (in 2021) to 5.25% (as of June 2024) has led to a significant increase in the cost of borrowing, which is typically above the Bank of England Base Rate. There is often a period of friction between drawing down the loan (when interest is payable) and using the loan proceeds for business purposes (e.g., paying suppliers, spending on CAPEX). Businesses can reduce their effective cost of borrowing by depositing loan proceeds in a high-interest account.
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Source: Unvested, HSBC
Benefit 3: Minimise Counterparty Risk
Counterparty risk, the possibility that the other party in a financial transaction may default, is significant for UK businesses holding large cash balances in one bank. By spreading your cash across multiple high-interest accounts or using Money Market Funds, you can reduce this risk. These strategies ensure funds are not overly concentrated, with many options providing FSCS protection up to £85,000. For example, an SME with £500,000 can distribute it across several accounts, maximising interest and ensuring most funds are protected. This diversification enhances financial stability, allowing you to focus on growth without worrying about potential bank failures. An alternative is to consider using Money Market funds. Click here to learn more
Conclusion
Optimising your business cash by using high-interest accounts can significantly enhance your financial performance. Don’t leave money on the table – consider high-interest solutions to ensure your cash is working as hard as you are.
Get in Touch
We can help you set up and manage high-interest accounts to optimise your excess cash. Contact us to learn more about how we can assist your business in maximising returns and improving liquidity.
