Treasury Management Idea for Companies That Carry Large Cash Balances

If your company normally carries high cash balances in its bank demand deposit account, you should consider a fairly common but little-known way to earn extra income on your idle money. Called repurchase agreements (REPOS or RP), this is a treasury management service that your bank may offer. It sweeps excess cash out of your checking account into an investment security. REPOS can be offered by banks or securities dealers that provide cash management services.

The method of handing the automatic sweep transaction is simple. With guidance of your banker, you set a high limit of cash you want to keep in your checking account. When the balance exceeds that amount, funds are automatically transferred to your investment. If your bank account goes below the preset amount, money is repurchased from your investment account into your checking account.

Banks market their REPOS under different names. Sometimes they are called “sweeps,” and sometimes a local bank invents a fancier name for them.

Here are some common features found in bank REPOS:

• Your investment is not FDIC insured while your cash is out of your checking account. The current FDIC insurance limit is $250,000; so this limit doesn’t affect many businesses that use REPOS since they carry balances above the FDIC insurance limit.
• Your bank has an agreement with a third party that provides the investment vehicle. The Fed Funds Rate is normally the benchmark rate your REPO is tied to. Your bank sets the amount of interest you will earn above Fed Funds and normally earns a small fee that is a percentage of the amount of your average investments.
• Most bank offered REPOS operate on an overnight basis. This means that excess funds are only transferred into the security at end of bank business on a daily basis and are transferred back at the start of the next banking day. Securities bought on an overnight basis have a one day maturity. There are also “term” REPOS that have a fixed term of maturity and “open” repos that keep funds invested as long as the excess funds are available. Term REPOS and open REPOS are most commonly available from securities brokers that offer business treasury management services.
• Banks that offer REPOS most often work with a third party that invests your funds in U.S. government overnight securities so that you have the safest possible investment.
• Your bank, using an overnight REPO gets use of your money during the banking day, which is the reason banks normally offer overnight REPOS.
• Given modern technology and the Internet, companies using bank treasury products can make changes to their REPO account through an online console. Most bank treasury systems are user friendly.
• Particularly if your bank is small, they may not tell you they have overnight REPOS available to you, but chances are good they do. You may have to ask.

It makes sense to earn interest revenues whenever you can do so safely. Bank-offered REPOs are a good way to add a little to your bottom line while still keeping your cash available for day-to-day use.