The idea that ‘cash is king’ can become particularly prevalent during times of economic uncertainty like the present.
But, even though cash deposits appear to offer a relatively safe haven for businesses, they are not entirely without risks.
In the long term they are likely to become eroded by inflation, which typically rises at a higher rate than the interest paid by most banks and building societies.
Although we have seen higher interest rates during the last couple of years, history suggests that this could well prove only to be a short-term trend.
The opportunity cost of missing out on higher returns from other types of investments should also be considered. Allowing profits just to mount up in a business account means this money isn’t actively working for the company or its owner.
If, for example, a business could enjoy annual returns of 10% or more via potentially more volatile investments can it really afford to leave everything earning around 2% in a standard deposit account?
Furthermore, even the largest financial institutions are not immune to going bust. Remember those 2007 scenes of desperate savers queuing to withdraw money from Northern Rock – then the UK’s fifth biggest lender!
The FSCS safeguard
Fortunately, virtually all firms – unless they are themselves financial services organisations – enjoy some protection against such an eventuality through the Financial Services Compensation Scheme (FSCS), as long as the bank or building society holding their cash is authorised by the Prudential Regulation Authority (PRA).
But the FSCS safety net only offers protection for up to £85,000 of cash deposits per business. However, if a business is a separate entity – like a limited company or LLP – £85,000 can be protected in a business account and a further £85,000 in a depositor’s personal account with the same savings institution.
Corporate investing
One solution to these risks is to invest some of the money in equities and other assets capable of realising returns considerably in excess of the inflation rate.
Chase de Vere is well placed to advise you on available approaches compatible with your risk appetite and to recommend appropriate portfolios and services. These will often diversify your money across a broad range of asset classes.
Taking into account factors such as the accounting basis you use, we can also advise you on the tax implications of making your corporate investment choices and, indeed, of not making them.
Whilst business owners can pay themselves dividends or salaries, taking too much out of the business to simply sit in a bank account can result in a significant tax bill.
We can also ensure you still retain an appropriate level of cash reserves to meet short-to-medium-term needs.
Remember that equities can fall steeply in value as well as rise, and no-one wants to sell at a loss. So, those going this route must be prepared to be without their money for five to ten years.
Cash management services
Another potential solution is to take advantage of cash management services that have emerged in recent years.
Via a platform, these can help you select from hundreds of different easy-access, short-term notice and fixed-term deposit accounts – even some of the more accessible ones are offering over 4.5% interest.
You can choose those accounts with the desired accessibility levels and interest rates and ensure that you have no more than £85,000 in each one. And we can support you doing this or even make the decisions for you.
Some clients with relatively small amounts of cash proactively approach us to seek help with maximising returns.
But you’d be surprised at how often we’ve come across SMEs seemingly oblivious to the poor rates they are earning on hundreds of thousands of pounds of cash – and to being potentially vulnerable to financial institutions folding.
Once we raise the subjects of cash management services or corporate investing they invariably see the sense in making at least some diversification.
If you would like to find out more about how Chase de Vere can help you to get higher returns from your cash and to ensure you are protected by the FSCS then please don’t hesitate to contact us.
The information contained within this article is for guidance only and does not constitute financial advice