Corporate Britain is, economically, generally healthy. There is however major divergence. The general consensus is that medium-sized businesses have been hoarding money during the downturn. This is because of the combination of fears of investing in a uncertain economy, as well as anxiety about the credit availability from the four major clearing banks i.e. support will not be available in the event that cash is exhausted.
For micro and small companies, the scenario is more dire. Although a majority of them have kept funds in their businesses however, there are a large amount of people who’ve needed credit but have been denied from their banks.
The result is that they are turning to rival banks such as Shawbrook and peer-to-peer lenders, and other forms of financing. These financial lifelines are expensive and have a cost. I’m sure that many small businesses will be pleased with the Financial Conduct Authority’s decision to take over regulation of the industry of consumer credit by replacing the Office of Fair Trading in April of next year and we hope that this will cut down the cost of financing.
The economy’s confidence is returning slowly and the question I get asked the most often by SMEs that have cash in their operations are “When will rates rise?”
I believe that we’ve reached the lowest point of the market, and some products have been able to hit natural flooring. The downside is that even though there’s plenty of competition among suppliers, this is still close to current price levels. I don’t think rates will increase significantly, but there is hope for the savers in 2014.
Over the last three years savings rates have not changed in any way that is related to the rates of base and LIBOR and I anticipate this trend to keep going. Savings rates will rise according to the the demand for cash from lenders and are mostly dictated by the major four banks which control the majority of balances. The banks have been spending the last couple of years trying to improve their balance sheets as well as paying back customers who have sold products that were not properly like PPI or SWAPS on small-business loans.
They have been internally focused on these issues, and have been shut off from lending to customers or extremely limited. I am expecting the situation to improve when the four big banks announce their annual results in the months of February and March. I expect that a lot of them will announce that they have made progress towards solving their issues and the effects on their business, and will be looking at rebuilding their lending books. I am predicting that any increase in the savings rate for SMEs to finance this will be a little less than that we’ll see a slight rate increase through 2014 – likely around 50-75bps throughout the year.
I believe we’ll also get more positive economic data as well as a rise in home prices starting in Q4 2013 through 2014, and this will pressure the Bank of England to raise base rates. But, if base rates do rise, businesses shouldn’t count on the major banks to show the growth on their saving rates. I anticipate the absence of relationship between base rate/LIBOR and savings rates to remain for the near to medium time.
The current economic downturn has seen a variety of new challenger banks, such as Shawbrook Bank, enter the market for savings and lending to fill in the gaps ignored by the big high-street banks. In a time where large banks often pay only 0.1 percent for deposits companies are looking at a variety of ways to earn an acceptable return. Notice and fixed rate accounts are becoming increasingly popular with companies that want to keep money within their operations.
Certain businesses are compensated a percentage of their charges upfront in the course of delivering projects and require to have a secure place to store their money. Alchemy Events is one such business , and it has a savings account for business with Shawbrook.
Claire Morton, founder and director for Alchemy Events, said: “I realized that any cash that we received from our clients had to be worked as hard as we could to provide us with a buffer of revenue in the form of interest, which we could use to boost our bottom line to ensure we would be able to remain competitive in price for our customers. It was also vital to ensure that our clients were protected cash and that’s why we divided deposits among different banks.”