Businesses that require flexible access to their cash are being penalised by low interest rates, according to analysis from investment platform Lightyear.
Lightyear analysed the interest rates for business accounts offered by top high street banks and found instant access accounts offering rates as low as 0.85%.
Across seven top banks analysed, the average interest rate for instant access was just 1.54%, with big-name banks like Nationwide, Lloyds, Barclays and Natwest offering rates well below the current rate of inflation.
Notice accounts offer slightly better rates, but often require lock-ins for up to 95 days, which is an unrealistic tradeoff for many businesses. This is particularly the case for SMEs, which may need more flexible access to cash as a buffer to cover late client payments and to maintain resilience in times of unexpected disruption.
On average, the interest rate on 95-day notice accounts sits at just above 3%, suggesting SMEs face a 1.5% interest penalty for flexibility.
According to Lightyear data, the average business has around £100,000 in their investment account — either for earning interest or investing in the stock market. With the average instant access account, a business would see its company cash grow by only £8,007.59, compared with £15,975.82 in the average 95-day notice account.
Therefore, the average business would lose out on around £8,000 in interest compounded over five years in an instant access account.
New competitors are beginning to offer challenger products so SMEs can have the flexibility they need, coupled with the ability to make their money work harder. Last year, Lightyear launched its business account, which includes the option for businesses to earn interest through Business Money Market Funds.
Managed by Blackrock, the world’s largest asset manager by AUM (over $10 trillion), these are highly liquid, low investment risk funds, traditionally reserved for large corporates who can buy in with a £1 million minimum investment. Business MMFs currently offer a rate of 4.41%, and crucially, these savings can be accessed and instantly withdrawn at any time.
An average business saving £100,000 using Business MMFs would accrue interest of £23,548 over five years, more than £ 4,450 more than the next best instant access competitor.
Wander Rutgers, UK CEO of Lightyear, said: “SMEs are the backbone of the UK economy, but right now they’re being punished by the need for flexibility. In a tough economic landscape, SMEs deserve to be able to earn more from their cash without restrictive lock-ins or penalties. Over five years, this can mean the difference of thousands, which for some businesses could be a make-or-break figure.”
