How a savings account can help strengthen your business finances

With interest rates rising, it might be a good time to consider depositing any surplus funds into a business savings account.

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Although inflation and rising costs continue to challenge UK businesses, the rise in interest rates might make this a good time to consider using a business savings account to set aside funds for future needs.

The Bank of England has recently raised the base rate of interest several times to tackle rising inflation, and this has resulted in higher interest being paid on some business savings accounts.

There are several reasons why companies might use their business savings accounts to accumulate funds, and structuring finances in this way can keep funds separate from the day-to-day business transactions in a current account.

Ways to use a business savings account

  • Save to pay business taxes 
  • Accumulate funds for future investment
  • Prepare for unexpected expenses
  • Improve your business’s financial profile

Emily Coltman, chief accountant with accounting software provider FreeAgent, says that now is as good a time as any to start building up your savings.

“Every little bit helps, whatever the rate of bank interest is,” she says. “But If you can get interest on your savings, it’s the cherry on the icing on the cake.”

Any interest made on business savings account deposits could be reinvested in the business or kept in the account, continuing to accrue more interest.

Over time, you could accumulate enough funds to reinvest in the future of your business, whether it’s by expanding your premises, investing in digital marketing, or buying new vehicles or equipment.

Putting money aside for taxes

A popular use for a business savings account is to put money aside in an account separately to pay corporation tax at the end of the tax year or VAT at the end of the quarter.

Emily says: “From a cash flow management point of view, reserving enough to pay your taxes when the time comes is very important. It means that you’ve got that money set aside specifically to pay your taxes and you won’t be tempted to spend it elsewhere.”

Paying business taxes on time is vital, even in a tough economy, she advises, as late payments to HMRC can lead to interest and penalties which will put an even bigger dent in cash flow than just simply paying what’s due on time.

Accounting software like FreeAgent can help you keep track of how much tax you could expect to pay at the end of the year.

Learn more about FreeAgent

Whether you’re putting money aside for a specific purpose, like taxes, or just making sure you have enough to cover any unexpected expenses, it’s important to select a business deposit account that allows you to access your money when you need it.

Instant access accounts typically pay less interest than fixed-term savings accounts or fixed bonds accounts, which can tie up your money for longer periods.

Explains Emily: “It’s no good putting the money into a five-year bond for your annual tax bill. It needs to be in an immediate-access savings account, which will, of course, affect the rate of interest.”

The actual amount of money a business should put aside, to cover taxes and provide a comfortable cash buffer, depends on the size and type of business.

“A business like a pub that needs to buy in a lot of stock to trade will probably want to have more cash saved than someone who is selling their own expertise, like an IT consultant,” says Emily.

Building a healthy balance sheet

When it comes to borrowing, having a healthy cash surplus in savings is likely to make you more attractive to a lender than having property and unpaid invoices but little or no cash.

If you think you may want to ask for a loan in the future, it’s a good idea to have a savings strategy to be able to show a cash surplus on your balance sheet when you’re ready to apply for the loan.

Says Emily: “Having money in your savings account would score you points with somebody like a lender if that was readily available cash in a current or instant access savings account, rather than being tied up in unpaid invoices or stock in the warehouse.”

She adds: “It’s never a bad idea to have a cash surplus in your business, and a savings account is a good place to hold it. There’s no downside, unless you’re putting away so much cash that you’re damaging your business in the process by not spending it.

“It’s not a case of ‘save absolutely every last penny you can.’ There’s a happy medium and that is different for every business.”

The interest rates we are offering business deposit-account customers changed recently. Start saving for your business’s future today by comparing our savings accounts.

Interest rates are subject to variation. Gross Rate - the interest rate you are paid without the deduction of UK income tax. Annual Equivalent rate (AER) - this is a notional rate of interest used for interest bearing accounts, which illustrates the rate if paid and compounded each year.

This material is published by NatWest Group plc (“NatWest Group”), for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by NatWest Group and NatWest Group makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of NatWest Group, as of this date and are subject to change without notice. Copyright © NatWest Group. All rights reserved.

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