A great deal of confusion exists around how the Financial Services Compensation Scheme (FSCS) applies to cash deposits, particularly for businesses. Here we clarify what businesses need to know and how to overcome the obstacles to ensure their company’s cash deposits are protected against loss.
More than a third of UK small and medium sized enterprises (SMEs) do not have a separate business deposit account for their cash reserves. Research carried out by YouGov1 shows that 34% of SMEs hold all of their cash in their business current account. There are a number of important reasons why businesses should open one or more separate business savings accounts. Here we outline the top four;
1. Business are missing out on billions in forgone income by not opening a separate account
As at January 2020, UK SMEs held £305 billion in cash deposits2. More than 90% of this is held with the 'Big Five' high street banks. Only one of these banks pays interest on business current account credit balances. This means that UK businesses are missing out on billions of pounds of potential interest income by keeping all of their cash in a zero or low interest current account despite the fact that there are accounts available to businesses paying up to 1.40% AER3 for instant access deposits and up to 1.55% AER3 for six month term deposits.
Firms that forego this extra income are effectively passing up the opportunity to increase their profits, grow their business by hiring extra staff, or invest in productivity improvements.
2. Prepare for unexpected events
In addition to making a material contribution to the bottom line, there are a number of other compelling benefits to opening a separate deposit account for a business’s cash reserves.
By their nature, it is difficult to prepare for unexpected events, however businesses will inevitably encounter unexpected costs from time to time, and so it is a good idea to have a contingency plan in place for these ‘rainy days’.
A dedicated savings account will help business owners and finance directors to deal with unplanned events and soften the financial blow. Ultimately, they will be more in control, reducing the time they spend worrying about and reacting to the unexpected, and can instead devote more time to driving the business forward.
3. Save for tax payments
A business’s annual tax bill can be one of their single biggest expenses each year and it is an outlay that can be planned for. With this in mind, it makes sense to set money aside for this purpose.
Using a separate business deposit account enables the business to ring-fence or build up funds to ensure that the payment is made in full and on time.
4. Reduce risk and protect the business’s cash reserves
Cash deposits are protected by the Financial Services Compensation Scheme (FSCS) up to the value of £85,000 per depositor per UK authorised bank. This means that if a bank fails and is unable to repay customers’ deposits, the FSCS will provide compensation up to that value.
Billions of pounds of UK SMEs’ cash is currently unprotected, as hundreds of thousands of businesses are holding more than £85,000 in their current account. In the event of a bank collapse, they would only receive FSCS compensation of £85,000 irrespective of the value in excess of this held in the account.
By opening a number of separate business deposit accounts with different UK authorised banks, businesses can increase their FSCS protection in increments of £85,000 with each additional account held.
Inertia to blame
The YouGov survey of over 500 UK SMEs reveals that the reason most frequently given by finance directors for not opening separate deposit accounts for their business’s excess cash is the hassle associated with opening new accounts. 39% of those surveyed said that the process of researching and opening new accounts was prohibitively complex and time consuming.
How to open new accounts paying market-leading rates, easily and efficiently
Whilst historically, opening additional deposit accounts has been an onerous process, break-through developments in financial technology have now made it possible to access market-leading savings accounts quickly and efficiently.
Cash deposit platforms allow business owners and finance directors to quickly and easily open multiple business savings accounts in few clicks, under one single application.
The Flagstone savings platform gives businesses access to hundreds of business deposit accounts provided by more than 40 banks, offering a huge choice of market-leading and exclusive rates; of up to 1.40% AER3 for instant access deposits, up to 1.80% AER3 for (95 day) notice accounts and up to 1.75% AER3 for 12 month term deposits.
Using the Flagstone platform, businesses can also easily maximise the FSCS protection of their deposits, by quickly and efficiently depositing up to £85,000 in accounts with different UK authorised banks.
To learn more about Flagstone and how the platform can make your cash work harder, watch this short video or open an account.
1 YouGov Survey of 538 SME Finance Decision Makers carried out between 11th April 2019 and 17th April 2019
2 Bank of England Data - Databases LPQZ3TX and LPQZ3U5
3 Rates correct as at 5th March 2020. AER (Annual Equivalent Rate) illustrates what the rate would be if interest was paid and compounded once each year.