For most businesses, when it comes to investing, cash is king. And who can blame them?
Perhaps they're, by their very nature, cash-generative. Perhaps they're operated by a business owner who's on the verge of retiring, but keen to keep cash in the business for the favourable corporation tax rates. Or perhaps they're simply looking to avoid the ups and downs of the market in today's uncertain environment.
After all, if there's one predictable thing about stock market investing, it's that your returns will be anything but. To put it in perspective, past performance would suggest that investing in the FTSE 100 for three years or fewer carries a nearly 20% chance of loss: quite a risk for businesses seeking a stable return.
And amid such political transformation and instability, it shouldn't be surprising that more cash is being hoarded away by small business owners. For instance, a recent Lloyds survey found that SMEs predict they'll invest, on average, 74% less in their company in 2017 compared to last year.
All this can make today's low-interest environment a torrid one, to say the least. With the Bank of England again deciding to maintain interest rates at 0.25% (an historic low), stashing it away with the high-street banks has never been less lucrative.
Throw in the prospect of major banks like of NatWest and RBS charging its business customers to deposit money with them – not to mention the rising levels of inflation predicted over the next few years – and we believe it all adds up to a miserable fact. The £100 billion that UK businesses are estimated to hold on deposit isn't growing at all; it's actually shrinking in real terms.
But what if there was an alternative for cash-rich companies dissatisfied with the return on their savings?
Well, over the last few years a new way to try and beat the banks has emerged: one that plays them at their own game. It's called 'peer-to-peer' lending and it gives both companies and individuals the chance to 'be the lending bank' – lending to others in return for regular interest. Although, of course, your capital is at risk.
One provider in this space is Octopus Investments, with a product it launched in April last year – Choice. It's built on one of the oldest asset classes around – asset-backed lending – and lets companies target around 4% a year by investing in high-quality loans secured against bricks and mortar.
Octopus also puts its money where its mouth is by investing alongside you in every loan. You'd get your money back before they do, and you'd receive any interest due before they did, too.
It could be a good solution for companies that aren't satisfied with their balance sheet cash losing value to inflation in bank deposit accounts, but which don't want the risk of market volatility, or for their money to be locked up for the long term. Choice aims to deliver an inflation-beating 4% a year (gross), with the ability to request withdrawals at any point, free of charge (though instant access can't be guaranteed).
However, don't forget that, unlike bank deposits, which are often guaranteed and covered by the Financial Services Compensation Scheme (FSCS), investments through Octopus Choice are not covered by the FSCS and your capital is at risk.
For more information see octopuschoice.com or contact Charlie Stoop (020 3142 4981, CStoop@octopusinvestments.com).
In a climate where British businesses probably can't help but feel burned by their bank rate, it's high time they tried to beat the bank at their own game. With most businesses needing to work hard for their money, we believe it's about time their money worked harder for them, too.