Giles Hutson, CEO of Insignis Cash Solutions explains how challenger banks now offer more attractive interest rates for SMEs.
With Brexit looming, the subsequent political instability and a raft of upcoming financial regulation coming into force, the outlook for 2018 remains uncertain for SMEs. While these circumstances lie outside the parameters of anyone’s control, engaging in active cash management in 2018 can give SMEs greater autonomy over their financial affairs, safeguard against unfavourable external variables and provide a much-needed boost for their businesses.
UK businesses currently hold over £800 billion of cash that isn’t being put to use – languishing in low-interest accounts with uncompetitive rates. An improvement of even just 1 per cent on these returns would release £8 billion back to these companies and result in a significant injection of capital into the UK economy.
Recent research shows UK SMEs have an average savings balance of £556,000. Additional annual revenue of £5,560, based on an improvement of 1 per cent in interest rates, could provide a vital buffer for SMEs in an extremely uncertain economic and political environment.
The traditional, convoluted process of pursuing competitive returns on cash makes it extremely tedious and time-consuming. It requires constant monitoring, with products being launched and withdrawn every day, and as a result, SMEs simply don’t have the motivation to seek out higher returns on their deposits. Additionally, a lot of SMEs operate on fine margins. They simply can’t dedicate time and resources to such activities and risk neglecting the day-to-day running of their businesses.
The resulting inertia means the market share for the top five UK banks is a staggering 83 per cent, yet there are over 150 banks taking deposits in the UK. We need to rethink how cash is viewed; right now SMEs and the UK at large is missing out on free money.
Banking has changed
The UK banking landscape has changed dramatically over the last ten years. Challenger banks have now become legitimate competitors to the top banks. This, coupled with the Financial Services Compensation Scheme (FSCS) eligibility guarantee makes challenger banks a competitive home for SME cash deposits. In some cases, rates offered by these challenger banks yield nearly twice the return of high street banks.
It’s not just rates that SMEs need to consider, but also liquidity. Does all your cash need to be held in easy access accounts? Holding funds across accounts with varying notice periods can make a meaningful difference to the total level of interest received. For example, you may require cash for an upcoming investment. While it’s important to have ready access to the money, businesses should consider notice accounts. Interest rates increase considerably when comparing notice and instant access. At present for example, SMEs can benefit from an additional 0.70 per cent on a 90 day notice account versus the rate on an instant access account. With forward planning, businesses can enjoy the returns while still having the confidence that the money is accessible.
Open Banking to encourage competition
New players are driving more competitive rates and Open Banking will be a catalyst for greater transparency, encouraging a stronger culture of shopping around among SMEs. A number of platforms have emerged in recent years which mean shopping around for the best rates no longer needs to be a headache – SMEs can work with one company to access multiple banks.
UK businesses can gain greater autonomy over their financial future in 2018, maintaining ready access to the right levels of cash while at the same time ensuring optimum returns. Through a more active approach to cash management, SMEs can start to fight back – improving cash deposit interest rates and increasing their financial fire power.
Further reading on interest rates