Never heard of sweep accounts? Once a secret perk for preferred banking customers, they're now becoming more widely known to smart entrepreneurs. In fact, a recent study found sweep accounts to be one of the fastest growing and most profitable banking products.
How Sweep Accounts Work
A sweep account links a commercial checking account with an investment account, such as a money market account or stock fund. It automatically keeps the checking account balance at a preset target level, by transferring funds to or from the investment account as needed. Sweep accounts allow small businesses to get higher returns on cash that might otherwise languish in commercial checking accounts. Because most small businesses don't have the time or capital to reap the benefits of more profitable investments, sweep accounts make a lot of sense.
Most sweep accounts require the business to maintain a minimum balance. The bank then "sweeps" the account (usually daily) and removes any funds in excess of the balance minimum. The bank automatically invests those funds in an account you select. When your checking account drops below its required balance, the bank automatically "sweeps" back enough cash to bring your account up to its required minimum balance.
It's smart to try and find a bank that is aggressively seeking new customers. You may get a special deal or extra value for your business. You should also consider smaller banks with just a few offices. They may have more relaxed rules and offer more personalized service, and they're less likely to have highly bureaucratized loan procedures.
Benefits of Sweep Accounts
Most banks charge a flat fee for a sweep account, although some may levy a percentage charge on yields. You're limited to a specified number of transactions per account before you start incurring extra fees. The definition of a transaction is set by each bank (see the fine print of the account agreement). Any transactions over the maximum number are subject to a separate fee.
Monthly fees for a sweep account start at $20 to $40, but they can run as high as $150 or more. Terms vary widely from bank to bank, so you'll need to shop around. Always make sure you'll earn enough in interest to offset the bank's fees — otherwise, it's not worth your while.