Understanding if Sweep Accounts Are Right for Your Business
When you own a business, money flows in and out of your bank accounts along with sales and expenses. While a checking account is a convenient place to store and access funds, it doesn't typically provide financial benefits in the form of interest.
Manually moving money into an investment account takes time, which is precious to business owners. To earn a higher interest on funds sitting in the bank, you can take advantage of sweep accounts.
How sweep accounts work
This financial product sweeps funds between a checking account and higher interest-bearing accounts. To take advantage of a sweep account, set a specific threshold of cash you want to keep in checking. At the close of the business day, any excess cash is automatically swept to an investment option, like a money market fund. If the balance in your checking account falls below the threshold, funds are swept back in from the investment account to avoid potential overdrafts.
Businesses may also set up a sweep account to pay down loans, such as lines of credit. In this case, excess funds are sent as loan payments, paying off the debt faster and reducing your overall interest expense. If your checking account falls beneath the threshold, you can pull from a line of credit to replenish the funds.
Pros and cons
The main advantage of sweep accounts is that they ensure your money is earning interest instead of sitting idle in your checking account. A sweep account also provides liquidity—many of the investment vehicles used are accessible, such as money market funds or high-interest savings accounts.
Because you don't have to monitor and manually move funds, you can spend more time focusing on your business. Through automation, a sweep account offers maximum earning potential with minimal effort.
But there are some downsides of sweep accounts worth noting. Sweeping money into the investment account can happen instantly. Still, there could be a delay moving money back to checking accounts if your funds drop below your threshold, which could result in cash flow challenges. Effectively managing your cash flow can help you avoid these situations.
While sweep accounts can save time for business owners, there are typically fees involved. In some cases, these might end up being higher than the earnings received from interest. You could also incur penalties if you need to withdraw funds early from certain interest-bearing accounts, such as certificates of deposit. It's essential to monitor the costs of sweep accounts to ensure you're getting maximum benefits. Finally, sweep accounts aren't insured by the FDIC
Is a sweep account right for you?
If you run a business that typically has a high deposit balance, a sweep account can help you get the most out of your money. It can help you earn higher interest on your cash and pay off your loans quicker. Just make sure you calculate your business loan payments and are aware of any risks or fees.
If you have any questions, talk to your business banker about whether a sweep account is a good financial tool for your business.
Financial insights for your business
This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.