Why Are Businesses Losing Over £7 billion a Year?

UK businesses are losing more than £7 billion a year due to a combination of low bank interest rates and above target inflation, says UHY Hacker Young, the national accountancy group.

Interest rates on business deposits are now at a record low, at just 0.59%. This combined with relatively high inflation (RPI 3.1% in July — compared to a target rate of 2%) mean that business savings are rapidly declining in value.

UHY Hacker Young points out the amount of cash held in business accounts that offer no interest at all has more than doubled since 2009 (see graph below). According to the Bank of England a record £52.9 billion is currently deposited in accounts yielding 0% interest.

Since the credit crunch lending to small businesses has become a priority for the Bank of England. Initiatives such as the Quantitative Easing programme and the Funding for Lending scheme — which are both designed to boost lending — have contributed to the slashing of interest rates.

Many businesses are now having to hold large cash balances because they feel when they need them, they can’t rely on banks to provide overdraft facilities at reasonable rates.

“As the Bank of England continues to focus its attention on reviving lending to small businesses, those with no current need to borrow are being punished for being prudent and keeping cash reserves,” Mark Giddens, Head of Private Client Services at UHY Hacker Young, explained.

“Before the Funding for Lending scheme was introduced, interest rates were competitive in order to attract savers. However, under the Funding for Lending scheme banks are now getting cheap funding from the Bank of England, which means they no longer need to offer generous interest rates to businesses.

“With the recent announcement that interest rates will remain low until unemployment falls below 7% – which economists are predicting won’t be until 2016 and the confirmation that Funding for Lending scheme will be extended until 2015 — businesses will continue to see the value of their savings eroded for some time to come.”