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Sweep Accounts – The Good, The Bad, and The Ugly

A sweep account is an arrangement between a bank and its customer – typically a business.  It is an efficient cash management tool that handles business funds on a daily basis and is offered by most commercial banks.  It can be utilized between a cash account and investment account or a line of credit.   It is very beneficial due to its flexibility, automation, and profitability.

It can be set up to initiate automatic transfers between a deposit account (i.e. checking account) and a line of credit.  This can be especially beneficial to larger corporations that have multiple accounts and variable payments on a daily basis.  The automated feature also ensures the checking account is funded on an as needed basis.  A common arrangement targets a zero balance in the checking account at the end of each business day by sweeping funds to and from the line of credit.  A seamless tool to ensure interest payments are kept in check.

A business can also utilize a sweep account as an investment vehicle.  Current banking rules do not allow banks to pay any type of interest on a business checking account.  The sweep account is a solution created to provide the best of both worlds – earn interest without tying up funds in an investment account.  This arrangement automatically transfers excess money from the checking account into a sweep account and vice versa as business funds are needed.

However, there are downsides to consider – monthly fees, lower interest, and even human error.  I strongly urge a daily review of bank balances.  I have seen instances where deposited funds were not being swept at the end of each business day.  Thereby increasing the amount of daily interest accrued on line of credit balances.  All in all, the pros definitely outweigh the cons and this tool should be part of your cash management toolbox. 

 

Pros:

§  No more idle funds – money is working for you automatically

§  Maximize investment balances

§  Minimize interest on line of credit balances

§  Increase profitability

§  Efficient cash management tool

§  Fairly simple to set up and implement

§  FDIC insured

 

Cons:

§  Monthly fees apply

§  Possible errors in processing funds

§  Not taking advantage of higher yielding alternatives

Lynda Steinbeck