When researching the best account options for your business, you may have come across the sweep account product. How can it benefit your company? This article will explain how sweep accounts work and what type to consider when you open a business account.
Sweep accounts are designed to optimize your business funds by transferring excess money from one account to another. At the end of the day or on a specific schedule, any surplus funds are moved into a higher-yield investment or savings product. Originally, sweep accounts were created to navigate regulations prohibiting banks from offering interest-earning checking accounts.
Mercury
Sweep accounts facilitate the transfer of funds between business accounts when the balance exceeds a certain limit. The primary purpose is to allow excess funds to earn additional interest in another account, typically a money market account. Another benefit of using sweep accounts is extending Federal Deposit Insurance Corporation (FDIC) coverage beyond the standard limit of $250,000.
Sweep accounts are designed to manage funds in a checking account efficiently. This is how it generally works.
To understand how sweep accounts work, consider the following example:
Imagine you have a checking account with a balance of $4,000. You also opened a sweep account and set a threshold of $6,000 for your checking account. In this scenario, no transfer occurs because your balance is below the $6,000 target amount.
A few days later, you deposited $5,000, bringing your total balance to $9,000. Since this amount exceeds your target balance of $6,000, the excess $3,000 will be transferred to the sweep account.
However, if you withdraw $4,000 from your checking account, your balance will drop to $2,000, below the established threshold. As a result, the $3,000 held in your sweep account will be transferred back into your main checking account.
Interest rates for sweep accounts can differ depending on the type of account and the provider. These rates are typically tiered based on your account balance and are subject to change at anytime. Some financial institutions may adjust their rates weekly in response to prevailing economic and market conditions.
Before deciding to open a sweep account, it’s important to understand the different types the financial institution offers, along with their terms and associated fees.
Consider each option carefully to determine which sweep account best fits your business needs.
Opening a sweep account can vary based on the provider, but the following steps outline the typical process:
Businesses can benefit from sweep accounts in several ways: they can earn interest on idle funds, protect larger reserves, and streamline cash management.
Financial providers offer sweep accounts and cash management accounts, but it is important not to confuse the two products. Below is a table that shows their differences.
| Offers limited features | Offers combined features of checking and savings |
| Allows access to FDIC coverage beyond the standard limit | Insured by the FDIC or SIPC |
| Lacks debit cards and check writing abilities | Provides debit cards and check writing abilities |
Sweep accounts optimize interest earnings on unused cash, while cash management accounts are useful for paying bills, making purchases, and withdrawing funds using a debit card. Both offer insurance protection through the FDIC or SIPC. However, sweep accounts can expand their insurance coverage through partnerships with banks.
Sweep accounts may incur fees, which can be costly if your small business has low reserve funds.
Yes, you can transfer money from your sweep account back to your primary account to withdraw funds. However, a penalty may apply for premature withdrawals.
Fixed deposit (FD) accounts differ from sweep accounts in that FDs are typically held for a fixed term at a specific interest rate, which is usually higher than traditional savings. In contrast, sweep accounts do not hold funds for a fixed period and allow transfers to and from the primary account. Depending on the account type, sweep accounts can provide higher FDIC protection or facilitate loan payments.
Yes, sweep accounts can help you earn interest on your excess company funds instead of leaving them idle.
Robi Mansueto brings over a decade of experience in consumer and preferred banking, with expertise in investment services, client relationship management, and financial product sales. She has held key roles at the Bank of the Philippine Islands and CIMB Securities (Singapore), where she managed high-net-worth clients and oversaw investment, loan, and securities transactions. With a strong background in client onboarding, compliance, and risk management, Robi has ensured strict adherence to regulatory standards throughout her career.
