Small businesses can now earn 5.15% interest on their cash with Lightyear

A neobroker is offering small businesses access to money market funds in a bid to boost their savings, This Is Money can reveal.

Lightyear, which was launched in the UK in 2021 by former Wise employees as a rival to the likes of Freetrade, has today launched accounts for small businesses.

The new business accounts will give clients access to money market funds, which Lightyear says have traditionally been reserved for large corporations.

Often described as cash bonds, the funds invest in a selection of investments considered to be the safest available, such as cash and cash-like instruments where returns are linked to interest rates.

Small businesses have repeatedly expressed concerns about their lack of access to finance, with previous studies showing that nearly half rely on a personal credit card to finance their business.

The Federation of Small Businesses (FSB) has previously written to the Financial Conduct Authority highlighting the “harsh” lending practices of banks requiring personal guarantees for business loans.

Lightyear says even newer options still don’t allow smaller businesses to open accounts and if they do, they come with “strict” deposit criteria, high fees and uncompetitive interest rate offerings.

“Any product that generates market interest for businesses often locks in fees and adds a lot of service fees on top of that, which ultimately reduces the value transferred to the customer,” he added.

Lightyear’s own analysis of Bank of England data shows that businesses are holding more cash than credit, but three-quarters of those savings are earning 1.7 per cent interest, despite the base rate remaining at 5.25 per cent.

What are money market funds?

Inflows into money market funds have soared over the past year as investors seek higher returns on their cash.

Money market funds, often described as cash bonds, invest in a selection of investments considered to be the safest available.

In terms of what they actually invest in, it is usually cash and similar instruments whose returns are linked to interest rates.

They also invest in short-term debt issued by governments and companies that are unlikely to default on their obligations.

Their yields have become more competitive as interest rates have risen and their relatively low risk profile has increased demand among retail investors.

Traditionally, companies could only invest in the funds, which track the BoE’s base rate, with a minimum investment of £1 million.

Martin Sokk, co-founder and CEO of Lightyear, said: “There’s a lot of talk about banks not passing on high rates to consumer savings, but what about business savings? The narrative around SMEs is dominated by the problems they face when trying to get finance – people assume that SMEs don’t have money to invest.

“But as our analysis shows, they certainly do. British companies now have more cash than credit. What is astonishing is that almost half a trillion pounds of that money is earning interest at 1.7 per cent.

“In the current economic climate, it is extremely important for companies to be smart about how they invest their money. But the options available to do so are virtually non-existent.”

What does Lightyear offer to small businesses?

The Lightyear Business Account will offer access to Blackrock Money Market Funds, where clients will earn 5.15 per cent APR (variable) in GBP on their savings, and there are no minimum or maximum deposit criteria.

They can also earn 5.37 percent in US dollars and 3.62 percent in euros, which is overnight interest that accrues daily and is paid monthly.

Clients will also have access to over 3,500 international stocks and ETFs across the US, UK and Europe.

The neobroker says there will be no account management fees and clients will be charged a flat fee of 0.25 percent; all numbers shown include these charges.

However, although the cash will be held in Blackrock’s AAA-rated money market funds, it is like any other investment. This means the value could go down and you could lose some or all of your savings.

Any uninvested cash deposited into the account will follow the base rate minus 0.75 percent, so companies can currently earn 4.5 percent.

Other platforms also offer interest on uninvested cash held in an ISA, although this is usually much lower than in a savings account.

AJ Bell offers 2.52 per cent interest on up to £10,000 in an ISA, rising to 3.55 per cent above £100,000, while Hargreaves Lansdown offers 2.2 per cent.

Interactive Investor offers 2 per cent on the first £10,000, rising to 2.75 per cent between £10,000.01 and £100,000, and 3.75 per cent between £100,000.01 and £1 million.

Any uninvested cash is covered by the EU-wide asset guarantee scheme up to €20,000, but not by the FSCS, which offers protection up to £85,000.