The UK is currently sweltering under a heatwave, and the sun looks set to keep shining for a few more days at least. However, the interest rate climate is uncertain, with rising inflation and the wider economic impact to be considered.
As discussed in last week's newsflash, rates are bound to rise sometime, although the Bank of England base rate is staying at 0.25% for the time being.
What about the USA?
Rates may soon be on the move if the UK follows the US pattern.
Over the Atlantic, interest rates were held at record lows since the financial crisis. The first increase in nine years came in December 2015, then in December 2016 and again in March this year.
Base rates in America are set using the Federal Reserve funds rate (this is the amount banks and other institutions charge each other to borrow money held at the central bank).
The Daily Telegraph says: "The US Federal Reserve is expected to raise its federal funds target to between 1.00% and 1.25%, from 0.75% to 1.0%."
Managing your savings while interest rates are low
Businesses are managing and optimising the opportunities and risks presented by Brexit and the current climate. You might have deposited money in the bank to act as a cash reserve, to save for new equipment or to fuel long-term business growth. A sensible business will make their money work as hard as possible, while keeping enough in a current account for effective cashflow.
Why leave your cash in business savings accounts that pay little or no interest when you could boost the income you receive by 10 to 12 times when you choose an account paying the highest rate?
UK businesses have £258bn in cash balances and make next to nothing on them – in some cases, businesses with cash holdings are being charged fees by their banks
A business with £2 million cash holdings could generate an additional £30,000 per year. This return could provide for a new marketing campaign or a staff member, contributing to productivity and profit.
Akoni CEO and co-founder, Felicia Meyerowitz Singh, says: "Most businesses sweat all assets, yet cash typically languishes."
A business savings account is the best place for any surplus funds, because they usually offer higher rates than a business current account. Broadly, you can choose between two types of business savings account:
1. Fixed rate bonds
With a fixed rate bond, you choose a term from one to three years. The rates on business bonds tend to be better than variable rate accounts, and are guaranteed so you know what you'll be getting.
Generally, the longer you’re willing to lock your funds away, the higher interest rate you’ll receive.
However, there's no flexibility, and you won’t be able to add funds. Usually, you won't be able to make any withdrawals before the maturity date. If you do, you’ll have to pay a significant penalty.
You could get 2.2% when you invest £500K in Secure Trust Bank for 60 months, or 2.0% over 48 months*
2. Variable rate accounts
'Variable' means providers can change the interest rate at any time.
With an easy access business savings account, you get instant access to your funds in case of emergency. These accounts are very flexible. The minimum balance is likely to be low, and there will be few withdrawal restrictions, so you can make as many deposits and withdrawals as you wish.
Interest rates are higher with a notice account, but you will have to give notice to your provider before you can withdraw any money. Notice periods generally vary from 30 days to 120. If they allow you to access funds earlier, there will usually be a penalty.
You could get 1.0% when you invest £500K in ICICI Bank instant access business savings account*
Things to look out for
It's important to consider the small print as well as the headline rate. Here are some questions to ask:
- Does the rate include a short-term bonus? If yes, you may need to move your savings when the rate drops
- Is your type of company eligible? Do you meet the turnover criteria?
- Is there a minimum investment requirement?
- Do you need to maintain a minimum balance at all times?
- How many penalty-free withdrawals can you make each year?
- Are you restricted to accessing the account only in branch, by phone or by post?
Ensure you're covered by FSCS protection
The Financial Services Compensation Scheme (FSCS) protects the first £85,000 you hold in each institution with a separate UK banking licence – but only if you’re a 'small business' that meets at least two of these criteria:
- 50 employees or fewer
- £6.5 million turnover or less
- £3.26 million balance sheet total or less
To find out more, please see our article: Are your deposits protected?
A note about tax
Interest is paid gross, so remember to notify HMRC of any tax your business owes on its savings interest.
Follow our cash management advice by shopping around to find the best rate, and you'll be happy to pay extra tax on the extra interest you've earned!
*Interest rates correct at time of writing.
Akoni helps businesses make the most of their cash. Register for free at AkoniHub.com