Sweep Your Idle Cash to Grow Your Business

Your business checking account is essential for your daily operations, but what if there was a way to grow any excess funds that sit in your checking account? Sweep Accounts automatically move idle cash to an interest-bearing account so your cash can grow. And you still have access to operating cash for business expenses.

What Is a Sweep Account?

A sweep account links two or more accounts and moves money between them according to the rules you set up in advance.

The primary account is almost always a standard business checking account that the business uses for day-to-day transactions. The other account is usually a higher-yielding money market, savings, or investment account, but it could also be a line of credit or even a mortgage account. When the checking account has funds in excess of a predetermined amount (the “target balance”) or all obligations have been paid, the excess balance or ending balance in the operating account is automatically transferred (“swept”) into the interest-bearing account. Funds can then be swept back into the checking account as needed. This enables the business to make better use of cash reserves without manually moving money back and forth between accounts.

Businesses with multiple checking accounts for various functions can also benefit from a special sweep account called a zero-balance account (ZBA). ZBAs involve a master account (also called a “parent” account) and subsidiary accounts (often called “subs” or “child” accounts) dedicated to specific expense lines, locations, or projects. Funds are swept from the master to subsidiary accounts to cover payments such as payroll, and any net balances are returned to the master account. Thus, each subsidiary account ends the day at $0, and funds are consolidated to optimize earnings.

How Do Sweep Accounts Work?

Here are three examples of sweep accounts in action:

1. Savings Sweep: Barstow Bakery used to hold all of its working capital in its standard business checking account. After setting up a sweep account with their business banker, balances are swept into a money market account, yielding significantly more interest than their checking account. Over the next year, the company expects to earn more than $15,000 in interest – and since it’s all automated, there’s no extra effort required.
2. Line of Credit Sweep: Streak Snowboards is a seasonal and cyclical business that relies on an unsecured business line of credit to help avoid cash flow crunches in the slow periods between holidays. In the past, the business has drawn from its $500,000 line whenever needed and made occasional principal payments when it’s flush with revenue. Now, the business’s checking account sweeps all balances to pay down its line of credit and save on interest payments.
3. Zero Balance Account: Tupelo Telecommunications has been accustomed to maintaining a dedicated payroll account. Twice a month, a few days before paychecks, the company’s bookkeeper would manually transfer the requisite funds from the primary checking account and, once a month, transfer back any surplus. By automating this process with a ZBA, the company was able to save administrative time.

What Are the Benefits of a Sweep Account?

As we’ve seen, using a sweep account may be a smart way to optimize your business’s cash flow:

1. Increase Earnings: By minimizing idle funds and directing more money into higher-yielding savings and investment vehicles, you can easily earn more. Or you can opt to tackle debt and pay less in financing charges.
2. Maximize Efficiency: Businesses may achieve some of the benefits of sweep accounts by performing manual transactions at the end of each day. But that would take time that would be better spent growing your business. Additionally, by consolidating your funds, you can see your cash position at a glance.
3. Manage Risk: Zero balance accounts help limit risk by only transferring funds as needed from a master account to cover transactions. This allows for more oversight and can reduce the chances of an unauthorized or erroneous payment.

Give Your Finances a Boost

Contact us for more info about sweep accounts and other valuable cash management tools for your growing business.