UK economy missing out on vital boost as SMEs stockpile £86bn of ‘dormant cash’ in low or zero-interest accounts

The UK economy is missing out on a vital boost as new research reveals SME’s are sitting on £86 billion of dormant cash in accounts paying little or no interest.

The research found that SMEs, which make up 99.9% of the UK’s 5.9 million firms, need quick access to 31% of their total cash reserves to cover the cost of day-to-day operations.

However, SMEs are actually holding an average of 57% of their total capital in current or instant-access accounts, rather than fixed-term deals that typically pay higher rates of interest.

Calculations carried out by the Centre for Economic and Business Research (CEBR) on behalf of Shawbrook reveal that this is causing SMEs to miss out on £4.2 billion in extra interest each year.

Shawbrook’s SME Savings Monitor provides insight into the attractiveness of the UK’s cash savings market, looking in detail at interest rates, SME savings mix, the number of new accounts opened and SME’s savings ratio. It is also supplemented with a survey of 500 senior SME decision makers to examine how small businesses perceive and behave in the cash savings market.

It found that in the last five years SMEs have increased their cash reserves by £66 billion to £329 billion – equal to 14% of the UK’s annual economic output – suggesting that firms are treading cautiously in the current economic and political environment.

The latest figures from UK Finance show some £186.1 billion of this money is being held in current accounts, which often pay no or little interest. This compares to the estimated £140.9 billion currently being held in deposit accounts.

Further, the number of new business accounts opened has plunged 21% year-on-year in the second quarter of 2019 – the fastest contraction on record, analysis of UK Finance data reveals.

Interest rates remain low by historical standards which partly explains why SMEs engagement in the savings market has reduced. More than four in ten firms say higher interest rates would encourage them to engage more with savings providers and the products on offer.

However, a lack of flexibility and innovation in the products available also appears to be having an impact, with 35% of SMEs stating that the ability to choose a deposit term that suits their needs would act as more of a draw.

SMEs also called for a reduction in the minimum deposit size with 24% of firms identifying it as a potential barrier to engagement.

Julian Hynd, Chief Operating Officer at Shawbrook Banks comments: “The amount of money SMEs are keeping in accounts paying little or no interest is indicative of the cautious nature of many firms in the current economic and political climate. While, of course, it is prudent for firms to keep some cash within easy reach to cover the daily costs of running a business, having too much money that is earning next to no interest – can have an adverse impact on finances.

“Small and medium-sized businesses are the backbone of UK plc and the savings industry needs to provide greater incentives to those firms to maximise the interest they receive on their cash reserves. Quicker access to better paying accounts, more innovative and flexible products and improved mobile and online services are just some of the ways providers can help tackle inertia in the market and encourage greater engagement from SMEs.”