The Economic Pain Of Small Business Cash Hoarders

In times of economic distress, it’s best not to panic. But for the U.K.’s small businesses, an array of concerns both at home and abroad mean business owners are not being as smart as they should with their money – and missing out on thousands of pounds as a result.

According to a new report from Hampshire Trust Bank, SMEs in the nation are hoarding their cash. Not only is that bad news for the economy, it’s poor financial planning for the businesses, analysts found.

The ratio of SMEs’ current account balances to savings account balances, researchers found, is £1 to £1.17. In a survey of small business owners, Hampshire Trust Bank found that only about 25 percent of SMEs feel confident enough to place their savings in an investment product for one year. More than half (56 percent) reported needing greater cash buffers.

More than one-quarter cited economic volatility as their top concern and main reason for not investing their money in a savings account. Researchers pinpointed the ongoing Greek debt crisis, the upcoming EU referendum, and the overall economic slowdown as key reasons why small business owners are hoarding their cash instead of investing it.

But while SMEs are keeping their savings stagnant on the belief that it will protect their cash, Hampshire Trust Bank said that this inaction means small businesses miss out on potentially thousands of pounds in interest funds.

“For cash-rich businesses there is a huge opportunity to maximize their money and make more out of every £1 they are earning,” said Hampshire Trust Bank head of savings Stuart Hulme, according to reports in the Telegraph.

Analysts found that on average, SMEs hold about £230,000 in their accounts. The bank used its own savings plan as an example of the funds on which SMEs are losing out. According to the institution, small businesses that move £100,000 into a savings account would receive £7,300 after five years.

Hampshire Trust Bank is one of the so-called challenger banks, new market entrants that are emerging to post greater competition to the U.K.’s five largest lenders. The influx of challenger banks is fueled largely by the Top 5 mainstream banks – HSBC, Llloyds, RBS, Barclays and Santander – failing to meet small businesses’ demand for loans and other financial services.

It’s no surprise, then, that Hampshire Trust Bank is sounding the alarm on why U.K. small businesses should take note of the firm’s new offerings. While the bank was established in 1977, it only recently re-emerged on the market as a specialist business bank. Its findings on SMEs cash reserves are further evidence that may convince small business owners to switch banks and take advantage of Hampshire Trust Bank’s new business savings products. But while these findings may provide a competitive edge to Hampshire Trust Bank, they speak some truth about why it is important for small businesses to invest their funds.

“The benefit of making use of these savings accounts is not only the interest rate return you get as a business, but also the knowledge that the money you are depositing is being lent on to businesses looking to grow, delivering double value and supporting the growth of the U.K. economy,” Hulme said.

The issue of small businesses hoarding their funds is not just a U.K. issue, either. New PwC research found that after the U.K., businesses in the U.S., France and Spain have been hoarding the most cash following the recession due to anxiety over another economic downturn. Findings from FactSet found that the S&P 500 companies are hoarding a record $1.4 trillion in cash in the U.S. alone – enough to acquire Netflix 53 times over, analysts said.

While businesses large and small may be set when the next economic downturn comes along, experts point out that for national and global economies overall, this is bad news. Hoarding cash, PwC declared, means small businesses are neglecting investments in new capital, staff or innovation – all of which benefit the market. It also means that small businesses are not returning funds to investors, which could then be re-invested in other businesses.

Still, according to Hampshire Trust Bank, small businesses may have the intention of pumping their savings back into the economy – it just isn’t clear when. According to the findings, 42 percent of SME owners said they are keeping their cash to invest in their own businesses in the future. Whether that will be anytime soon – and whether small businesses in other jurisdictions hold the same intentions – has yet to be seen.