UK small and medium-sized businesses are set to miss out on a whopping £4 billion in interest in the next 12 months because their cash reserves are languishing in low-interest accounts, a new study reveals.
A major new report from CEBR, the Centre for Economic & Business Research, commissioned by Flagstone, the UK’s largest cash deposit platform, reveals SMEs are missing out on billions of pounds every year by not shopping around for a better rate for their excess cash – the reserves not required for the day-to-day running of the business.
The extra £4 billion which businesses could earn if they moved their money to a better deposit account would be enough to fund for a year the salaries of more than 104,000 extra workers on the UK average annual salary of £29,588.1
With SMEs currently holding an estimated £199 billion in instant-access accounts and receiving an average rate of 0.41%2, they are on track to earn £578 million in interest in the coming year. However, if they were to switch to a market leading instant-access rate of 1.40%3, they would earn £2.8 billion in total in the next year; £2.2 billion more than they are currently expected to earn.
Further, UK SMEs currently hold an estimated £140 billion in fixed-rate deposit accounts earning on average 0.85%, meaning they are expected to earn £1.2 billion in the next 12 months. But if SMEs instead switched to the market-leading 2.10%3 one-year fixed rate, they would collectively earn £2.9 billion in interest in the coming 12 months; £1.7 billion more than they would have otherwise.
It means, in total, firms are expected to miss out on £4 billion in interest in the next year because their money is languishing in low-rate deposit accounts.
Bank of England and UK Finance data show that UK SMEs have increased their cash balances from £191 billion to £339 billion between 2011 and 2019, and the YouGov survey4 which forms part of the CEBR study confirms that more than a third (34%) said that Brexit had been a factor in the management of their cash balances over the past 3 years.
The YouGov survey of over 500 UK SMEs, also reveals that the greatest barrier to getting a better rate on their cash deposits is the hassle associated with opening new accounts. 39% of businesses surveyed said that this was a reason for not switching their money,
Andrew Thatcher, Co-Founder and Co-Managing Partner of Flagstone, said: “This study shows that apathy towards cash deposits does not just affect individual savers, but also the nation’s businesses too. Each year, UK SMEs are missing out on billions of pounds of interest income because they are not proactive in moving their money, often citing the process of researching and opening new accounts as prohibitively complex and time consuming.
“Firms that forego this extra cash could be missing out on the chance to increase profit, grow their business by hiring extra staff, or invest in productivity improvements. This may also be damaging to the UK economy given that SMEs account for 99.9% of all UK private sector businesses and 60% of all private sector employment5.
Thatcher concludes, “Platform solutions not only consistently keeps business owners and financial directors in the path of the best rates, but it also removes the barriers to switching, providing a simple way to increase income and reduce risk.”
1 Employee earnings in the UK: 2018, released by ONS on 25 October 2018. Annual figure calculated by multiplying median full-time gross weekly earnings (£569) by 52
2 All figures on current SME cash holdings and average interest rates are Bank of England data, analysed by the CEBR
3 Market Leading Corporate Deposit Rates as at 13 September 2019.
4 Survey of 538 SME finance decision makers carried out by YouGov between 11 April 2019 and 17 April 2019
5 Source: London School of Economics’ Centre for Economic Performance; ‘Unlocking SME productivity’ Sept 2018
This article is written for the St James’ Place Entrepreneurs Club newsletter. The opinions expressed by third parties are their own are not necessarily shared by St. James’s Place Wealth Management.
This article has been provided courtesy of Flagstone.