How to build a financial buffer for your small business

While it is important to keep a constant eye on cashflow in your small business, it is equally important to invest in its long-term financial health to build a financial buffer, save for Capex projects or even just have the peace of mind that you set funds aside for a rainy day.

In 2022, individuals and businesses had to navigate rising inflation and interest rates along with the unexpected costs of staying in business through various stages of load shedding. While responding to short-term pressures, many small business owners may have lost sight of the long game made possible by saving money in a long-term account.

“Building financial health for your business takes time, careful planning and a clear strategy as you balance your business’s daily needs with its long-term financial goals,” says Natisha Lazarus, head of business banking at Sasfin.

Small business owners have several products to choose from, but the overriding rule is to be sure that you understand the terms and conditions of the savings or investment product you choose to avoid complications when your small business needs access to those funds, she says.

“An effective savings strategy that includes different types of savings products gives small business owners the long-term benefits of interest-earning funds set aside to meet business goals, while still allowing access to their money in case of emergencies,” explains Sanjeev Bessar, who has a specific mandate to empower small businesses at Sasfin.

He advises small business owners to look for an overdraft product that responds to your business requirements from a bank that offers personalised expertise and advice that supports your commercial skills and abilities.

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These are the options you can choose from:

Notice deposit accounts

A notice deposit account gives you the flexibility you need to access your funds while you are rewarded with a higher interest rate for saving your funds for longer. A 32-day notice account, for example, offers a nominal interest rate of 7.50%, while a 120-day notice account offers a nominal interest rate of 8.05%.

Notice periods of varying lengths are available to suit the needs of each small business. Lazarus points out that interest rates are linked to the prime interest rate, which means that interest earned increases if that rate is raised by the Reserve Bank and your capital is guaranteed.

You can add extra funds to these accounts at any time and because interest is paid at the beginning of each month, balances benefit from compound interest too.

 “Flexibility and control over your savings commitment lets you manage the working capital of your small business,” Bradley Reddy, who leads the medium-sized customer segment at Sasfin Business Banking adds.

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Fixed deposit accounts for a financial buffer

A fixed deposit account requires you to pay a specified amount for a predetermined time period, helping small business owners to stick to their savings goals while offering relatively higher interest rates.

A six-month fixed deposit account, for example, offers a nominal interest rate of 7.58%, while a 36-month fixed deposit account offers as much as 8.7%. Over time, compound interest means that the effective annual interest rate on that product could be 9.90%.

“Many of our clients choose a 12-month fixed deposit product, as this gives them a balance between benefitting from a better interest rate for a longer savings commitment and access to their savings as part of their future business planning,” Reddy explains.

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Call deposit

A call deposit account gives small business owners the flexibility they need to access saved funds immediately, while making it possible to add funds as and when you can. The prime-linked nominal interest rate of 6.95% helps the money you saved to grow, as interest is paid at the beginning of every month.