Sweep Accounts

By: Kathleen McNamara

Ever wish you could exercise in your sleep? That when you woke up and headed into the office, your desk would be in perfect order and your morning cup of coffee waiting?

Well, these wishes probably aren't going to come true anytime soon. But when you start looking at the bottom line of your company's finances, it's entirely possible to put your money to work even when you're not.

Local financial institutions offer sweep accounts that can perform this very function, helping you get the biggest investment from surplus funds that might otherwise sit idle in your checking account. "A sweep is the opportunity to earn a little extra money on your excess cash balances," explains Mark Morris, president and CEO of First National Bank of Fort Myers.

Before you sign up for any financial service, however, you'll need to understand how the sweep works and what resources you'll need to maintain it.

How it Works

The premise behind a sweep account is simple enough: the customer and bank negotiate a certain checking account balance, and at a specified time (usually overnight) the bank automatically transfers any surplus funds into an investment. Some banks also offer a zero balance sweep account, where all incoming funds are put to work.

The rate of return on the sweep depends on what type of an investment the customer chooses -- repurchase agreements, certificates of deposit and even mutual funds are among the options. Logically, the bigger the surplus, the larger the returns. For very large corporations, the numbers can be very large on an annual basis. "That can vary ... from $10,000 to $10 million or $20 million," says Terry Madura, treasury manager at Fifth Third Bank, Florida.

Investments aren't the only place the funds can be swept, either. The bank can place the funds into a loan, enabling the customer to save interest on an approved line of credit. And if an account drops below the minimum balance, the bank can sweep the funds back to cover new withdrawals.

Pull quote:

... make sure to check transaction limits -- some banks will only allow a certain number of free sweeps.

An obvious benefit to sweep customers is the ability to make money work even when it's sitting at the bank. Another benefit is efficiency: fewer trips running back and forth to make transactions and less paperwork to fill out. Depending on the conditions of the account, the bank will usually charge a service fee, which can vary from a "per sweep" fee to a set monthly amount. The fee is usually more than offset by the amount of interest earned on the investment. However, make sure to check transaction limits -- some banks will only allow a certain number of free sweeps. "You have to look at the cash management side of it," Morris warns.

The Account Balance

Banks offer these types of accounts because they are prohibited from offering interest on most types of commercial checking accounts. Additionally, some business accounts have a large number of transactions in and out of their accounts, making them poor candidates for certificates of deposit and other types of interest-bearing accounts that penalize for early withdrawal. Enter the sweep account.

Banks must perform a great deal of extra work to maintain sweep accounts because of the amount of in-and out-flow of funds in the average checking account -- and because of strict regulations for these accounts. Therefore, many banks won't take on this service unless the account balance is substantial, usually starting in the $100,000 range.

However, some local banks now offer this service for smaller business customers, as starting around $25,000 on the investment side. First National of Fort Myers is among those that will set up these smaller sweep accounts, "because our business is small business," Morris says.

"It's a good line of business for us," he adds. "We have found from small business that it is a value added to offer sweep accounts."

Watch Your Surplus

It's generally true that the bigger chunk of change you have to work with, the more leveraging power you'll have. And the more services you hire the bank to perform, the more likely you can negotiate a better deal. "If you have other needs, yes, you're going to get a better package," says Robbie Roepstorff, president of Edison National Bank.

Make sure you fully examine the risk involved in any sweep arrangement and know exactly where the surplus is going. Returns in a mutual fund may travel into the double digits, for example, but they are not FDIC insured. Most banks instead opt for low- or no-risk investments, with returns in the 4 1/2 to 6 percent range. At Fifth Third, Madura says, the bank will commonly sweep into repurchase agreements, which are government-guaranteed returns on the bank's securities.

Roepstorff recommend keeping an eye on the overall market to weed out any potentially unstable investments. "If you look and find out the yield is so much higher than at the other banks, you'd better make sure that it's a sound investment," she says.

Lastly, when working out a sweep account, it can only help to establish a good relationship with your banker. Morris also recommends the inclusion of a periodic financial review in your sweep account agreement. That way, you will have the "trigger" to reassess your financial picture every so often and make necessary adjustments to your account.