Credit Matters Blog

Low Interest Rates - Time To Leave The Bank?

Kim Radok 17 January 2017


Banks have never been or never will be your friends in business. At best, they are a partner in name only as a source of funds to grow your business. As many business people, have found to their cost, the Banks are not always the most reliable of business partners.

At this point of time in history, bank interest rates for business finance have never been so low. It also appears the banks are starting to raise their interest rates. Inevitably, interest on mainstream business finance will also rise.

This suggests, traditional thinking on banking and borrowing are probably due for review. A number of commentators for example are suggesting that keeping money in the bank these days is virtually useless. On one point, I can agree with these commentators, especially if a portion of this money can be used to improve your business. A business operating efficiently costs less to operate and frees up time and energy to seek other income objectives.

When it comes to borrowing, I am not a big advocate if you don't have to borrow. Once you become a borrower, you are the mercy of the Bank's decision makers, many of who have never operated a business and are ruled by the whims of their senior managers. In addition, the interest and fees for any finance facility are an expense. As my first business accountant warned me, "... an expense is an expense which needs to be paid for and is never covered by a reduced tax bill."

Let us assume you have additional funds sitting in your bank account. How would these fund best be applied? My suggestions follow.

(i) Pay all suppliers and creditors in a paid in a timely manner and restore your creditability. The laissez-faire offering of credit by businesses will change in the future. If you don't have a good payment record, you may not obtain business credit facilities in the future.

We have seen a similar change in the B2C environment where businesses no longer give credit to consumers.

(ii) Take up special offers for early payments or other discounts to reduce buying costs.

(iii) Spend the funds to improve business operations to achieve best practice, efficiencies and improve due diligence on suppliers and customers. Reducing expenses via efficiencies, avoids the costs of repairing mistakes, some of which can never be repaired no matter how much cash is spent.

If you can safely say you have achieved the aforementioned objectives, money in the bank is a sound investment these days. Yes, the interest rates are low. More importantly however, the money is safe. Your cash is then quickly available to seize other business opportunities. There are no messy bank forms to complete, waiting for the finance to be approved, only to see your prize slip away to another party with the cash.

As history shows, cash is never lazy, just resting. If you listen carefully to those that say cash is lazy, you will always "hear" they have something to sell or they want your cash for themselves.

Low interest rates for money in the bank, does make us think we can do more with our money. The problem is that to earn "a better return" these days is usually is lot riskier than in the past. If the money in the bank does "burn a hole in your pockets", it would be wise to use a portion of it to improve your business operations. After all, an efficient business saves costs, enhances reputation and may make funds available to take up those business opportunities which always occur in turbulent times.