Business savings accounts: How to make your money work harder as interest rates rise

 
This content was provided by Allica Bank. 

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When interest rates rise, a business savings account is a good way to maximise any spare cash you have in your business.

However, many business owners do not take advantage because they assume they don’t have enough spare cash or they will have to lock up their money for too long.

While owners should consider the minimum deposit and term requirements, the market for business savings accounts is wide-ranging enough that even businesses with a small amount available to save for a short period can benefit.

Advantages of a business savings accounts

The main advantage of opening a business savings account is being able to increase the money you put in by taking advantage of the interest rate on offer.

You don’t necessarily need to store money for a very long time and can receive some returns even if you know you will need to withdraw the money fairly soon. To do this, you should use cash flow forecasts to understand what money is available to save.

Types of business savings accounts

The main way business savings accounts differ depends on how long you store your money and how much interest you receive for doing so.

The length of time you save will usually affect the interest you receive, as well as whether you’re able to access fixed or variable interest rates. A fixed rate of interest does not change over time. A variable interest rate is one that banks can move up or down. Therefore borrowers need to be aware that variable rates can move above or below fixed rates.

The three main types of business savings accounts are outlined below.

Instant or easy access account

This type of account is suited to any business that wants to generate interest on their savings but may need greater flexibility to access the money in the short term. Each bank offers a slightly different instant or easy access account but some common characteristics include:

• More options to deposit or withdraw funds
• Variable rates of interest
• Typically lower rates than other business savings accounts

Fixed-term account

This type of account is designed for businesses that know they can store money in an account for a specific period without needing to withdraw it and want to achieve a higher interest rate for doing so. The main features of this type of account are:

• A good option if you know you do not need to access money for a set period
• Typically enables businesses in this situation to access higher interest rates
• Often more likely to include fixed interest rates that can provide greater peace of mind
• No early access normally permitted, with money locked away until maturity

Notice savings account

A notice savings account is something of a hybrid option, providing some of the interest benefits of a fixed-term account and some of the withdrawal flexibility of an instant or easy access account. If you need to withdraw your funds for any reason, you will have a notice period that allows you to do so. Business owners may choose this option for the following reasons:

• A hybrid option that can offer better interest rates alongside withdrawal flexibility
• Unlike fixed-term accounts, business savers can withdraw their funds after giving notice
• Unlike instant accounts, funds are released only once the notice period has expired
• After a notice period, you can withdraw funds without normally being penalised
• Notice periods are usually set somewhere between 30 days and 180 days

Assessing your business savings account options

Understanding the different features of a business savings account will help you to identify whether they are a potential avenue for your business and which option is the correct one.

• Returns and flexibility. You’ll need to weigh up how much you want to maximise the returns you receive against how much flexibility you need to access your money.
• Access to your money. It’s important to consider when you might need to access the money you put into a business savings account and what the likelihood is of that timeline changing.
• Minimum deposit. Some instant or easy access accounts require only £1,000 but fixed-term accounts require a minimum deposit that is often a lot more.
• Annual Equivalent Rate (AER). This rate is used because some providers pay interest monthly and others pay annually. AER provides a standardised way to compare rates.
• Account management. Each bank will be different, so it's important to familiarise yourself with the functionality being offered, including whether your account can be managed online.
• Withdrawal penalties. Early withdrawals from fixed-term accounts are normally not allowed, while notice accounts let you withdraw if you do so by providing the correct notice.
• Protection of money. The Financial Services Compensation Scheme (FSCS) protects certain savings accounts subject to limits and other scheme rules.

How to open a business savings account

Each bank will be different in terms of how you do this, with the easiest access options occurring  entirely online. Whether online or offline though, you’re likely to be asked to provide various details about yourself, your business and the key people involved.

Some common requirements for opening a business savings account include your business’s name, address, shareholders and existing bank account details, as well as personal details and identification documents to back up this information.

Once you’ve decided which business savings account is right for you and can meet the requirements, you’ll be well placed to make your money work harder and maximise returns!

On a final note, as always you should read the terms and conditions of any financial products, and seek professional advice where relevant.