A new home for your cash reserves?

Published by Terry Burgum on 16 July 2019

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For many small businesses it is a perennial issue. Where can you place your cash reserves to keep the funds accessible in the short term, yet receive a rate of interest that may offset the negative effects of inflation?

If the ongoing Brexit saga is leading you to defer investment of surplus cash into your business in the short term, a safe yet more productive home for your cash may be needed more than ever.

Could the emergence of Cash Management Services and Cash Savings Platforms be the answer to this problem?

These relatively new services act as a deposit account ‘supermarket’ offering access to term deposits from a range of providers for both personal and business clients.

By taking the leg work out of researching the extensive range of deposit accounts available, these services aim to offer you the best returns for your cash whilst spreading your money far and wide to reduce the institutional risk associated with banks and other deposit takers.

Cash Management Service

Generally speaking, a Cash Management Service will offer access to providers on a ‘Whole of Market’ approach. They look to deliver a diversified portfolio of accounts and savings bonds to provide you with the liquidity and security you are comfortable with whilst improving returns.

Individual applications will still need to be made and account opening formalities completed, and whilst the service provides assistance with this administration, you will still need to actively participate in the account opening process.

Cash Savings Platforms

Alternatively, Cash Savings Platforms offer an automated approach, requiring the client to complete only one initial application, with all the individual savings accounts being opened by the platform provider thereafter.

However, as this level of service requires detailed agreements between the Platform operator and the deposit provider, the range of accounts will be limited to a restricted panel of Banks and Building Societies that the individual platform has been able to successfully negotiate an agreement with.

Sounds good but what are the downsides?

Firstly, there will be costs involved. The costs of this service will reduce the overall returns and may be met by a spread between the interest rate provided by the platform provider and that received from the ultimate deposit taker, or by a direct cost paid from the deposits held on the platform.

Therefore, the additional benefit must be worth the cost of researching the market yourself and completing your own applications.

Secondly, you are still faced with the issue of institutional risk. What happens if the deposit taker fails, will you get your money back?

It is important to understand just who your money is being held with. In order to provide higher interest rates, your money may be placed with the less established ‘challenger banks’ rather than the ‘big four’, who your money may well be with at the present.

Whilst all deposit takers have to conform to Financial Conduct Authority (FCA) requirements, this is not a guarantee and it is important to remember that generally speaking the security offered by the Financial Services Compensation Scheme does not apply to business and corporate account holders.

It is therefore important to understand the financial strength of the underlying deposit holder, as they hold your money, and not the platform or service provider you use. One method is to consider the ‘credit rating’ of the individual Banks involved which may lead you to restrict the range of deposit takers you are prepared to use, where this option is available.

As technology improves we expect to see these types of service evolve and become more commonplace. With the reward of higher interest rates and reduced administration they appear an attractive solution for your short-term savings, provided you understand the risks involved and where the benefits outweigh the time and costs involved.

However, even with the higher interest rates on offer, your cash may still struggle to maintain pace with inflation given the low interest rate environment we have seen for many years. Where you expect to hold reserves over the medium to longer term, alternative investments with higher growth potential may be more relevant for your needs.

Should you wish to discuss investments for your business please feel free to contact Terry Burgum at Kreston Reeves Financial Planning here or on +44 (0)330 124 1399.

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