Written by Suzette Covalt
Originally created to help get around a government regulation (Reg. Q) that restricted banks from offering interest on commercial checking accounts, the Sweep Account was born. A loop hole – if you will.
What is a Sweep Account?
As the name implies it is an account that sweeps or transfers excess funds from one account to another to earn a higher rate of return. You determine the threshold you would like to remain in your account and at the close of business each day any remaining amount over that threshold will be swept to a higher interest paying account.
Generally, one account is your operating account that all your credits (deposits) and debits (withdrawals) run through, on a daily basis, and the other account, where the money is swept to each night, is usually a money market account. Since money market account rates are on the rise this could be a good time to set up that sweep account.
There are 3 ways to benefit from having this service.
- The money is transferred automatically so there is no need to visit the bank which makes it one less thing for you to worry about!
- Your money is earning higher interest instead of sitting idle in a low or non-interest bearing account-More bang for your buck!
- If your checking account threshold drops below the minimum your money market will automatically sweep back the amount needed to bring it back up. Again, no worry for you!
The 3 most common types of sweep accounts:
- Money Market Sweep
This is where you invest your excess money from your operating checking account to increase your earnings and if your checking account threshold falls below the minimum amount, funds from your sweep (money market account) will automatically transfer back into your checking account. - Loan Sweep
This is where your excess money is transferred directly to your loan to help business owners pay their debts faster. - External Sweep
This is where some banks offer to sweep your excess funds that are over the FDIC coverage limit of $250,000, they are able to sweep your money to other financial institutions while still offering you the security of the FDIC for your funds over the $250,000 limit.
Sweep accounts are a convenient way to earn a higher rate of return on the extra money that is sitting unused in your low or non-interest checking account.
Many financial institutions offer automatic sweep accounts coupled with the end of day transfers which makes it stress free for business owners since they will not have to worry about forgetting to make their transfers.
Some sweep accounts are packaged accounts and “come with” your banking relationships while others are stand alone and may cost you more than you will earn so be sure to research and collect all the details up front before establishing the account. The key is finding an account that matches your needs to your financial goals.
