A business sweep account is a type of deposit account that allows businesses to automatically move excess funds from their checking accounts to higher-yielding investments, such as money market funds or certificates of deposit.
This process is designed to help businesses earn a higher return on their idle funds, while still maintaining liquidity and easy access to their money.
Businesses can sweep excess funds from their checking accounts at any time, often at a set interval, such as daily or weekly.
By automating the sweep process, businesses can minimize the time their funds are idle and maximize their earning potential.
What is a Business Sweep Account?
A business sweep account is a type of account that automatically transfers excess funds to a higher-interest investment option at the close of each business day.
You can set your own threshold, so you have control over how much excess cash is transferred. Typically, this threshold is set above the minimum balance required for your business operations.
Business sweep accounts leverage automation to maximize every extra dollar, making them a convenient option for businesses with fluctuating cash balances.
How It Works
A business sweep account is a type of account that helps you manage your finances more efficiently. It's essentially a linked account that automatically transfers funds between your main account and an investment account when the balance falls below or exceeds a preset minimum.
To set up a sweep account, you'll need to deposit a lump sum of money into the account, and then determine an average balance that should be kept in the account. This amount may be pre-determined by the institution.
Most of the extra cash above the average balance will be invested into a money market, CD, or some other form of investment that can be easily liquidated. This is to earn higher returns than an ordinary bank account.
The financial institution will ask for more funds to be put into the investment account or recommend other forms of investments and liquidation if the funds in the investment accounts fall low enough.
Here's a breakdown of the process:
- A cash account is set up first
- A lump sum of money is deposited into the cash account
- An average balance is determined and set
- Extra cash above the average balance is invested into a money market, CD, or other investment
- The investment is liquidated and proceeds are deposited into the cash account when the balance falls below the average balance
Benefits and Uses
A business sweep account is a convenient way to ensure your company's idle funds are earning a return rather than sitting in a low-interest bank account.
You can set up a sweep account to automatically transfer excess funds into a savings account or money market fund that earns a higher interest rate, such as up to 4.00% APY on savings balances.
This can be especially helpful for businesses with fluctuating cash flow, as it allows you to keep a set amount of money in your checking account to pay bills without overdrawing, while also earning interest on excess funds.
Some institutions offer an auto-sweep feature, which links the sweep account to the non-sweep account and initiates transfers automatically when defined thresholds are crossed.
By using a sweep account, you can also take advantage of additional FDIC insurance, up to $2M, to protect your funds.
Here are some benefits of using a sweep account for your business:
• May help you earn higher interest rates or investment returns
• Happens automatically at the close of each business day
• May be FDIC-insured or protected by SIPC
Setting Up and Managing
To set up a sweep account, follow these steps: you can get started by following the steps outlined in the article.
First, you'll want to determine your daily cash limit, which is typically the amount you need for day-to-day operations. This threshold is usually set at $50,000, but you can adjust it based on your company's gross burn rate.
Next, you'll need to open your sweep account online, which will serve as your origin account where your funds will transfer from. This account will be with your chosen bank or brokerage, which you'll vet to ensure it meets your needs.
With your sweep account set up, you can automate some of your cash flow tasks, such as parking extra funds in a savings account that serves as a stop-gap or emergency fund. This way, if your cash flow dries up one month, you'll have those funds waiting for you.
You can set it and forget it, as the sweep account will automatically transfer funds daily, no additional oversight required.
Limitations and Risks
Sweep accounts can be a smart way to earn interest on your business's idle funds, but it's essential to be aware of the potential limitations and risks.
Deposit limits can be a problem, as not all brokerages offer unlimited free deposits. Some will set a threshold you can transfer with your sweep account in a month.
Fees and restrictions are another thing to watch out for. Your sweep account may charge a flat rate or a percentage of your yield, which can negate the extra interest your cash has earned.
Withdrawal penalties can also cut into your earned interest. Some sweep accounts charge a penalty for premature withdrawals, so check the account's terms and conditions to see if that's the case.
Your bank or brokerage may charge additional fees for using a sweep account, which might cancel out the interest earned. This can be a major drawback, especially if you're not aware of the fees upfront.
Here are some potential fees and restrictions to consider:
It's also worth noting that your sweep account may not be FDIC-insured, but it could be covered by the SIPC. This is an important consideration, especially if you're storing large amounts of cash in the account.
Key Information
A business sweep account can be a valuable tool for managing daily cash flow and maximizing earning potential on sitting cash reserves. It automatically transfers excess funds into a higher-interest investment product.
Businesses often set a minimum balance for their main checking account, and any funds above this threshold are swept into a higher-interest investment product. This can help minimize cash drag and capitalize on the immediate availability of higher-interest accounts.
Depending on the institution and investment vehicle, the sweep process is generally set daily from the checking account. The return of funds can experience delays, so it's essential to understand the terms and conditions of the sweep account service.
Some banking institutions offer high-interest rates on amounts over certain balances, making sweep accounts an attractive option for businesses with fluctuating cash reserves.
Here are some key characteristics of business sweep accounts:
- Automatically transfer excess funds into a higher-interest investment product
- Minimize cash drag and capitalize on higher-interest accounts
- May not always be free, with fees that can make the sweep less attractive on a net basis
Frequently Asked Questions
Do banks still do sweep accounts?
Yes, banks still offer sweep accounts, but they often have lower yields compared to traditional money market funds. Many brokerage firms have shifted to bank sweeps, but some, like Fidelity, still offer alternative options.
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