How small businesses can get a top rate on their cash

Small- and medium-sized enterprises (SMEs) are earning little or even no interest at all on hundreds of thousands of pounds held in the bank, potentially missing out on a useful source of income. The average SME in the UK has £446,000 in its savings account, according to new research from Hampshire Bank Trust. What's more, 86% of the companies it surveyed intend to maintain or increase their balances in the year ahead amid nervousness about economic uncertainty. However, many SMEs routinely opt for the savings account offered by their current-account provider. Since the big banks that dominate the SME market typically pay extremely low rates of interest, they will be making virtually no return on their cash.

For example, Barclays' Business Premium Account pays no interest at all on balances of up to £999,999, increasing to just 0.05% on £1m or more, points out Savings Champion, the independent savings-market analyst. Its high-street competitors aren't much better. NatWest pays 0.01% on its Business Reserve account, regardless of the balance held, while HSBC only manages 0.03% on balances of up to £999,999 in its Instant Access Business Money Manager account, increasing to just 0.04% on more than £1m. Lloyds pays 0.05% on balances of £1 or more to smaller businesses with a turnover of up to £1m on its Business Instant Access account, reducing to 0.01% for businesses with larger sales.

By contrast, many of the smaller banks and building societies including the challenger brands that have begun to target the SME market offer significantly better deals. Secure Trust Bank, for example, offers 1.35% on balances of more than £1,000 in its 90 Day Notice Account, says comparison site Moneyfacts. Cambridge Building Society, Hampshire Trust Bank, Hodge Bank, Shawbrook and United Trust Bank all offer 1% or more on similar products, while Aldermore pays 0.5% on an instant-access account.

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These rates may still sound low they reflect the Bank of England's ongoing policy to hold base rates at only 0.25% but can still deliver a modest amount of income on larger balances, and will help to reduce the extent to which inflation is eroding the value of your business savings. For example, Secure Trust's market-leading account would pay £6,021 a year on the average SME's £446,000 balance, which is better than nothing.

The best current-account deals

As in the savings market, shopping around for a good deal on a current account can save considerable sums for small businesses. Competition in the small-business banking sector is hotting up, with challenger banks increasingly forcing the established high-street brands to raise their game.

The challengers compete on a variety of fronts, often focusing on digital technologies to deliver a slick and accessible banking experience, but also promising superior service levels. And while not all offer current accounts, providers such as Metro Bank, Handelsbanken and Danske Bank are providing enough competition to make life more difficult for their larger and more established rivals. New entrants such as APS Financial, meanwhile, are adding to the competitive mix through alternative digital-banking business models that don't require a full-scale banking licence.

The arrival of these disruptors has seen the big banks engage in something of a price war. Among the high-street names, RBS, HSBC, Lloyds and NatWest all now offer lengthy periods of fee-free banking to new SME customers anything from 18 to 24 months. So does Santander, which is winning an increasing share of the market. Among the second-tier institutions, Yorkshire Bank now offers 25 months of fee-free banking. That said, Cater Allen a subsidiary of Santander and London-based Metro Bank both offer fee-free banking as long as you retain a current account balance of £5,000 or more, which may make them the best option for many small firms.

This competition is good news, but only if firms take advantage of the deals on offer. As in the consumer banking market, it's increasingly easy to switch a business current account, so it's worth making the effort to see if you can get a better account elsewhere.