The UK’s SMEs could be missing out on thousands in interest due to a reluctance to use savings accounts, according to new research.
Challenger bank, Hampshire Trust Bank (HTB), found that smaller businesses are choosing to keep their cash in current accounts in case of economic shocks, such as the possibility that Greece could exit the Euro, or the upcoming European referendum, instead of earning interest in a savings account.
The findings revealed that, on average, a small business in the UK has £230,000 in a current account, while the ratio of those balances to savings is £1 to £1.17.
Of the 500 SMEs that HTB surveyed, 26 per cent cited the economy as a concern. Only a quarter said they felt confident enough to put cash into a savings account for a year.
So what other factors are preventing small businesses from saving? Philip Brennan, head of Businesscomparison.com, said: “While economic uncertainty is a consideration for SMEs, the low interest rates offered by savings accounts is the biggest concern for business owners. It’s a case of businesses simply not wanting to tie up their money in this way for one or two per cent.”
He continued: “Another consideration is the recent drop in availability of overdrafts, meaning more businesses are holding onto their cash in case of emergencies.”
Indeed, recent figures from the Bank of England have revealed that the amount being lent to SMEs through overdrafts has fallen by 40 per cent since 2011, placing additional pressure on business cash flows.
In the past, an overdraft could have provided reserve funds, but with this is no longer a viable option, companies are having to ensure they have cash flow available at all times. 56 per cent of respondents in HTB’s study agreed, citing the need for greater cash buffers as their reason for not saving.
But is keeping the money in current accounts the only option? Brennan doesn’t think so: “There are a number of funding choices available to SMEs, but many are unaware of what they offer and how they work. By taking the time to understand which option would provide the best benefits – from preferential interest rates to guaranteed funds – smaller businesses can ensure they are getting the best deal and making the most of the money they have.
“We’ve developed our Finance Finder to simplify this process and help SMEs clearly see what the marketplace has to offer.”