Negative interest rates: Concern over charge for business deposits

Amid warnings from Natwest that businesses might have to pay to hold cash, we look at the implication of negative interest rates in the SME community.

In an already uncertain time, the possibility of NatWest charging for deposits in a climate of negative interest rates will be a worrying sign for micro-businesses with small margins and limited options in terms of how they use their capital, experts have said.

Howard Graham, CEO of start-up specialist Made Simple Group says, ‘Lenders are clearly taking precautions in the event of interest rates turning negative, but the strategy could backfire if businesses begin to vote with their feet and abandon the traditional loyalty, so common among business customers, in search of free banking.

‘That said, if rates do turn negative, it is conceivable that all of the big banks will eventually go down this route. In a seemingly never-ending climate of very low interest rates, they are struggling to make money and this could be the way that banking goes.’

Certain banks throughout Europe and in Japan have already established negative interest rates, adds Andrew Burns, director of business development at C2FO.

‘The result is that deposits are actually being eroded. Cash is being lost. The risk profile on supposedly one of the safest places for cash is extremely high given the loss is guaranteed and the return for that risk is zero.’

The challenge, Burns says, is finding an alternative investment that returns to the normal paradigm of risk/returns.

‘Those Treasuries with their finger on the pulse are benefiting from a low-risk, high-return investment alternative: their supply chain. Market-based dynamic discounting platforms are averaging 6.8 per cent APR returns on cash through investment in AP: early payment in return for discounts.’

Negative interest rates only ‘add insult to injury’ for businesses that are not receiving the financial support they need from banks, according to James Sherwin Smith, CEO of Growth Street.

‘Business overdraft lending by banks is down 50 per cent in four years. Many businesses have resorted to holding deposits to survive dips in cash flow. This in itself is concerning, as businesses cannot reinvest profits, reducing growth and levels of employment.

‘This news further highlights the need for a competitive and wholly diversified business finance sector. The government must ensure that it supports alternative providers so that SMEs are not reliant on large banks.’

Chloe Webber, operations director of Company Check, says that on the one hand, there’s no bigger incentive than negative interest rates to encourage firms to spend their cash and invest in CapEx or new hires, and all that hopefully leads to more growth.

‘However, the challenges that have led us to this situation, Brexit uncertainty and steep falls in consumer, service and manufacturing confidence, suggest that the country’s got a tricky time ahead,’ she adds. ‘If rates are cut, as is widely expected, I think that SMEs generally will take heart from the fact that the Bank of England is acting swiftly to steady the economy.’

Further reading on business banking

Ben Lobel

Ben Lobel

Ben Lobel was the editor of from 2010 to 2018. He specialises in writing for start-up and scale-up companies in the areas of finance, marketing and HR.

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