What Is a Sweep Account?

A sweep account is a type of bank account that is used by many businesses and is offered by most commercial banks. This type of account is designed to be a go between with a cash account for business purposes and an investment account. This type of account can be very beneficial to businesses as it provides them with flexibility and profitability.

Sweep Account

When a business sets up a new business checking account, they may be interested in earning interest on their money. However, with current banking rules, banks cannot pay any type of interest on a business checking account. Some businesses might even be tempted to put some of their money into an investment account so that it can earn interest. The only problem with this solution is that throughout the regular course of running the business, they may need access to the money to cover expenses. Therefore, this solution does not work either because their money could be tied up in investments.

The sweep account is a solution that was created in order to provide the best of both worlds. With this type of account, excess money from the cash account is automatically swept into the sweep account. At that point, the bank can pay interest on it or move it into a specific type of investment. Then, if the customer needs quick access to the money, it can be immediately transferred from the sweep account back into their cash account.

Setting it Up

The process of setting up a sweep account is relatively simple and can be administered by the bank when a business sets up a new account. For this process to be initiated, the business needs to set up a traditional business checking account with the bank. They will then need to make a cash deposit into the bank. At that point, a financial advisor will sit down with the business owner and discuss the options regarding the sweep account. For example, they will most likely set up a minimum amount that needs to be kept in the cash account at all times. The business owner can determine how much money they need to effectively run the business and avoid cash flow problems. 

At that point, at the end of every business day, the money that is in the account above that minimum balance will be swept into the sweep account. This money can be used to put into a CD, a money market account, or some other type of short-term investment. This will provide a return for the investor while still providing them with some money to run their business.

If the cash account balance falls below certain threshold, the money from the sweep account will be transferred back into the cash account to replenish it. This helps keep the cash account above a certain amount of money at all times so that the daily operations of the business will not be affected.