Business savings account: best rates, benefits and how to choose

Once your small business is generating healthy revenues and turning a profit, you’ll want to maximise these profits. One way to do this is to open a business savings account alongside your business current account. This gives you a place to save your surplus cash and earn a high amount of interest on the balance.

Let’s explore the benefits of having a business savings account and which type of account is best for your needs as a growing business.

What is a business savings account and how does it work?

A business savings account can be used to hold and grow your company’s surplus capital. 

Unlike a business current account, which is for daily transactions and expenses, a savings account offers higher interest rates. However, a savings account will typically have restrictions on the number of withdrawals or transactions you can make.

The key purpose of a business savings account is to build up a pot of money, and for the bank to pay you monthly interest on the account balance. This helps you increase your capital through sensible use of savings and high interest rates. 

Common use cases for a business savings account include:

• Setting aside tax contributions each month, so you have a lump sum to pay your corporation tax at the end of the financial year. 
• Building up an emergency fund, so you have a contingency account if money is needed for unexpected costs that are not included in your main budget.
• Saving for future investment, allowing you to set profits aside, accrue interest and maximise the available capital for investment in the business.

What are the key restrictions on a savings account, compared with a current account? 

Business savings accounts and business current accounts both allow you to save, spend and build up capital for use in the business. But a savings account will have some limitations in place, to restrict your access to the funds in the account. 

Common restrictions will include:

• Limited transactions: Many savings accounts restrict the number of free withdrawals you can make within a certain period. So you may be limited to only two or three withdrawals per year. Exceeding this limit often results in a lower interest rate for the period, or a direct penalty fee.
• Notice periods: Some savings accounts, known as notice accounts, require you to give a set period of advance notice before you can access your funds. This period can vary greatly depending on the bank and the conditions for the account. If you withdraw money without giving the proper notice, this will generally result in a significant loss of interest.
• Fixed terms: The most restrictive type of savings account is a fixed-term business savings account, sometimes known as a deposit account or bond. These accounts require you to lock your money away for a specific, predetermined period (for example, 6 months or a year). During this time, you can’t make any withdrawals without incurring a substantial penalty. Sometimes, withdrawals are not permitted at all within the agreed term.

What types of business savings accounts are available?

The restrictions on how you can access and withdraw your funds mean it’s important to choose the right kind of account for your business savings needs. 

Here’s a brief rundown of the main types of account: 

• Easy/instant access accounts: These savings accounts have flexible withdrawals, making it easier to dip into the account when needed. However, this flexibility has to be balanced against lower interest rates, meaning it will take longer to earn interest and build up your savings.
• Notice accounts: This type of savings account offers higher rates, so your savings can work harder to earn interest and build up a healthy savings pot. But the restrictions on withdrawals make it more difficult to take out ad-hoc amounts and reduce the flexibility of this capital. 
• Fixed-term accounts: Saving accounts that offer fixed terms will have the best interest rates. You’ll earn the best possible interest on your savings, but the funds are locked in for an agreed period. This makes these accounts best suited to long-term goals where you don’t need immediate access to the capital.

Which account type offers the highest interest rates?

Fixed-term business savings accounts usually offer the highest interest rates, but funds are locked in for a set period. The combination of high interest and a fixed term make these types of savings account best suited to saving for a specific long-term goal; e.g., buying an expensive new asset like machinery or property.

What are the benefits of opening a business savings account for SMEs?

You may be asking yourself, ‘Why does my company need a business savings account?’. In short, the main advantage of having a savings account is that it gives you a place to consolidate your surplus cash while earning some healthy interest. 

However, there are other broad-ranging benefits of putting your surplus capital into a business savings account.

Let’s look at the main plus points:

1. Grow cash reserves with interest earnings

Running a business can be unpredictable, with unforeseen costs and dips in sales along the way. Having healthy cash reserves set aside is a sensible move. These reserves provide funds to dip into when cash is tight, or unplanned expenses threaten your cash flow.

2. Ring-fence funds for tax bills, payroll or reinvestment

There are specific costs that the business will incur throughout the year, whether that’s your annual tax bill, or the cost of covering your payroll for 12 months. Putting funds into a ring-fenced savings account can protect them from being spent on other everyday operational expenses – meaning you have the capital in the bank when your tax bill needs paying, or payroll comes around each month. 

3. Improve cash flow planning and financial discipline

Having back-up funds in the bank is a fundamental part of a good cash flow management strategy. You can move cash across from a flexible savings account into the company’s business current account when cash flow gaps arise. This allows you to maintain a positive cash flow position throughout the period. 

4. Build a financial buffer to weather slower trading periods

If your industry has seasonal slow periods, having cash reserves in the bank can help to fund the business during any fallow periods. When revenues dip during quieter months, you have the assurance of the funds tucked away in your business savings account – as long as your terms allow flexible withdrawals.

Overcoming cash flow problems can require a combination of financial tactics. For example, pairing cash-reserve savings with flexible borrowing can help you balance growth opportunities and the company’s cash protection.

Short-term business loans, like an iwoca small business loan, allow you to top up your working capital, in combination with the funds in your business savings account. 

Are business savings accounts protected by the FSCS?

Yes, most UK business savings accounts are protected by the Financial Services Compensation Scheme (FSCS) up to £85,000 per institution.

Your eligibility for protection depends on your business’s legal structure:

• Limited companies and limited liability partnerships (LLPs) are typically eligible for their own separate £85,000 protection limit, as they’re considered distinct legal entities from the owners.
• Sole traders are treated as individuals. Their business savings are combined with any personal savings they hold with the same bank, and the combined total is protected up to a single £85,000 limit.

Best business savings account rates in the UK right now

If you’re thinking of opening a business savings account, it’s a good idea to research the current market before making a decision on which bank to partner with. 

This is especially true when it comes to the all-important interest rate that your money will earn while left untouched in the account. 

Here’s our rundown of some current savings accounts and rates: 

Unless you have a fixed-term deposit account with a fixed interest rate, the interest rate for your business savings account can (and almost certainly will) change over time. Review your rates regularly to ensure you get the best possible return on your business savings. 

How to choose and open the right business savings account

Choosing the best business savings account for your circumstances means doing the right amount of homework before deciding on a specific bank and account.

Factors to weigh up include: 

• The available interest rate on your savings 
• Access to your savings
• Whether you will benefit from FSCS protection 
• Additional account fees that can add to the cost of the account 
• The reputation of the bank or specialist provider.

Make sure you’ve considered all of the elements before applying for an account.

Applying for a business savings account

Once you’ve narrowed down your choice of account to the ideal option, the next step will be to apply for your business savings account.

This will usually be done either in-branch with a business relationship manager, or online through the bank’s website. You may be able to contact the bank on the phone or via a chat assistant to express your interest in opening an account, but the full verification and checking process will need to take place in person or online.

Eligibility requirements for SMEs and startups

To apply for a business savings account, you’ll usually need to meet some standard eligibility requirements to qualify with the bank.

Here’s an overview of the usual requirements:

• An existing business current account: Most major banks require you to have a business current account already open with the bank. This is the primary method for moving funds to and from the savings account.
• UK residency: The business and its key individuals (directors, partners, or the sole trader) must be UK residents and have a UK business address.
• Legal standing: You’ll need to be a registered business entity, such as a limited company, partnership or a sole trader.
• Age: You must be at least 18 years old.
• Financial standing: The business or sole trader will typically be subject to a credit check and must have no history of insolvency or bad credit. 

Can sole traders open a business savings account?

Yes, many banks allow sole traders to open business savings accounts, though some specific products may be limited to registered companies. As a sole trader, you’ll still need to supply confirmation of your business status and business performance. 

iwoca: short-term finance to help you invest in and grow your business

Opening a business savings account and putting your surplus profits into a high-interest account is a great way to expand your working capital. 

But if you have specific growth plans that need additional funding, a short-term loan can help expand that capital even further – getting you to your growth goal fast.

An iwoca small business loan helps you unlock funding quickly by giving you speedy access to the additional capital needed to scale and grow. 

With iwoca you can:

• Borrow from £1,000 to £1 million
• Get a decision in 24 hours
• Repay early with no fees
• Repay the loan from 1 day to 60 months

Find the extra capital you need with iwoca and start growing today!

Apply for an iwoca Small Business Loan

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