Interest rates have risen rapidly over the past few months. With the Bank of England base rate (aka the Bank Rate) now at the 5% mark (September 2024), surely this is good news if you have cash in your business bank account?
Well, not if all of your spare funds are sitting in a business current account!
Zero interest on business current accounts
At Bytestart, we were shocked to learn that it is virtually impossible to earn any interest on a business current account.
We haven’t earned interest on our business account for over ten years for obvious reasons. But despite over a dozen Bank Rate rises in a row, our high street bank still pays zero interest on our cash balance.
And it’s not just our bank. It appears to be the same with every high-street bank: Zero interest is paid on most current account balances.
This is very concerning, as inflation is destroying the value of any money in your business’s current account.
Any ‘incentives’ you might get, like a one-off credit for opening a new account or cashback on purchases, are petty compared to the amount of money the banks earn by lending out funds at 5%+ to borrowers.
So, what should – or what can – small business owners do?
If you have cash reserves in your current account – either retained profits and/or money put aside to meet future tax liabilities, then now is the perfect time to open a business savings account.
At the time of writing, you can earn up to 3 or 4% interest per year on your cash if you move it to a business savings account (aka a business deposit bank account).
There are several types of business deposit accounts
Easy access accounts (instant access)
As the name suggests, an instant access deposit account allows you to access your money anytime without penalty.
This type of deposit account gives you the most flexibility and means that you can immediately access your money without incurring any fees if there are some unforeseen circumstances.
Because you have immediate access to your funds, the rate of interest you earn on an instant access deposit account is lower than you would get with a term deposit account.
Notice accounts
You must give the bank advance notice of your withdrawal. For obvious reasons, the interest rates you can earn from notice accounts are higher than those in ‘easy access’ but lower than those in fixed-term accounts of one year or more (see below).
The notice periods for many of the most popular offerings tend to be 90 or 180 days, although some accounts offer notice periods of as little as a week.
Fixed-term accounts
If you are happy to hold your money for longer, say six months or more, you can opt for a longer term, and you will be rewarded with a higher interest rate.
The flip-side, of course, is that you won’t be able to access your money until the end of the term.
The minimum deposit levels you need to qualify for a term account are usually higher than those for an instant access account.
The interest you earn relates to the ease with which you can access your funds.
The AER interest rates quoted were correct as of 23rd September 2024.
Some examples of current ‘easy access’ interest rates
Tide Business Savings Account – pays 4.07% AER (variable) up to 31st March 2025. Open a free business current account + instant savings account at the same time. Find out more here.
Aldermore Easy Access Account Issue 10 – pays 3.5% Gross Annual Interest. Find out more here.
Virgin Money Business Access Savings Account pays 3.55%. Find out more here.
Barclays’ Easy Access – 1.5% – Find out more here.
Lloyds’ Easy Access – 1% (up to £1m) – Find out more here.
Some examples of current notice term interest rates
You can compare over 70 accounts at Moneyfacts here. At the time of writing the highest rate was 5.01% for the 180-day Business Variable Account from Allica Bank. Many alternatives are paying between 4% and 5%.
Some examples of current fixed term interest rates
Aldermore 1-Year Fixed Rate Savings Account pays 4% p.a. Find out more here.
Shawbrook 1-Year Fixed Rate Savings Bond pays 4.56% p.a. Find out more here.
Virgin Money 1-Year Business Term Deposit pays 4.5%. Find out more here.
Lloyds’ 1-Year Fixed Term Deposit pays 3.5% p.a. Find out more here.
Business savings accounts – FAQs
Do I need a business current account to open a savings account?
Yes, you do. You need a current account to transfer funds into and out of your savings account.
Do I need to use the same bank for my deposit account as my current account?
Not necessarily. You can choose a completely different provider for your business savings account.
Is there a minimum deposit for a business savings account?
This depends on the type of deposit account you choose. You might be able to open an instant access account with just £1, but the minimum deposit for a fixed-term bond will likely be higher.
Does the FSCS protect my funds?
Yes, business deposits are protected like individual bank deposits – up to £85,000 – via the Financial Services Compensation Scheme. Be aware that if you’re a sole trader, personal and business funds will be treated as a single entity, whereas a limited company is a separate entity to its shareholders. Read more about the FSCS on the official site here.
In summary
Clearly, if you have funds in your business current account, unless you have a ‘premium’ current account or something similar, you’re unlikely to earn a penny in interest.
We recommend you take some time to compare the business savings account marketplace, transfer any funds you don’t require for working capital, and earn some interest!
This is one quick win any business can achieve without committing a great deal of time or effort!
Simply open a free business current account to qualify + 12 months free transactions. Read our Tide review. Open a Tide savings account at the same time and earn an excellent 4.07% AER (variable) on your spare funds.
