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Business owners missing out on billions of pounds of interest on business savings

If you’re a business owner, making decisions about your banking and where you keep your savings deposits might not be at the top of your list of priorities.

However, new research has suggested that small and medium-sized businesses in the UK are losing more than £4 billion in interest. Read about why SMEs are losing out and get three great tips to improve your business savings returns.

SMEs losing £4.2 billion a year in savings interest

A new study by Shawbrook Bank, including calculations from the Centre for Economic and Business Research (CEBR), has revealed that small businesses are losing £4.2 billion in interest on their savings deposits.

This lost interest is mainly due to:

  • A failure to optimise the levels of investment into fixed term deposits and easy access accounts
  • Apathy to switching accounts because of low interest rates

The findings revealed that small businesses have, on average, 57% of their total capital held in a business ‘easy access’ account, while they only need 31% of these reserves to meet their day-to-day cashflow needs.

As a result, businesses are earning less money on funds they could potentially invest in a fixed-term deposit account, which usually pay higher rates of interest.

The study also found that two in five SMEs (42%) said that higher interest rates would encourage them to be more engaged with their savings portfolios.

Even in an environment where interest rates are relatively stable, SMEs can still increase their returns. The report suggests that businesses could increase their interest rates by more than four times by moving from an easy access to a fixed-term product of less than two years.

Data from financial analysts Moneyfacts shows that the average interest rate for a business easy access account is just 0.36% for a balance of £1,000.

Meanwhile, a fixed term deposit of less than two years pays an average of 1.47% for a £1,000 opening deposit.

How you could more than double your savings returns – a case study

Here’s an example of how you could generate better returns on your business savings.

If your total capital is £50,000, the report says you would currently hold 57% of this in a business easy access account. That’s £28,500 earning an average interest rate of 0.36%, which equates to just £102.60 a year in interest.

If you reduced your reserves in your easy access account to the suggested 31%, you’d reduce your cash in your easy access account to £15,500. At an average interest rate of 0.36%, you’d earn £55.80 in interest in a year.

However, you could then put the remaining capital (£13,000) in a fixed-term deposit, paying an average interest rate of 1.47%. This would generate £191.10 interest in a year.

Overall, you’d more than double the amount of interest you received, from £102.60 to £246.90.

3 ways to improve business savings returns

Here are three ways to maximise the interest earned on business deposits.

1. Shop around for a better rate on your easy access savings

Keeping some of your savings in an easy access account means you have funds available when you need access to cash quickly. However, you could earn more than double the interest on your savings in just one year by moving to a better easy access account.

Moving from an account paying the average rate of 0.36% to the top rate (currently around 1%) would more than double your returns. For example, £20,000 saved into an account at 1% would earn £200 in interest; £128 more than an account paying 0.36%.

2. Transfer funds to a notice account

If you’re looking for a better return on funds that you don’t need straight away, consider moving some of your savings to a 90+ day notice account.

The top-paying 90+ day notice accounts are currently paying around 1.5%. On a £20,000 deposit as above, this would generate interest of £300 a year, equivalent to £228 a year better than the average easy access savings account.

3. Move funds you don’t need into a fixed term account

If you have money in your business that you don’t need access to, switching it into a two-year fixed-rate bond could generate better returns again.

For example, moving £20,000 from the average easy access account to the top-paying two-year fixed-rate bond (at around 1.9%) would see you generate £308 more in interest each year.

Get in touch

If you need help with your business savings and investments, please get in touch. Email hello@sovereign-ifa.co.uk or call 01454 416 653.

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