Sweep accounts are designed to optimize your business funds by transferring excess money from one account to another. At the end of the day or on a specific schedule, any surplus funds are moved into a higher-yield investment or savings product. Originally, sweep accounts were created to navigate regulations prohibiting banks from offering interest-earning checking accounts.
Mercury
Mercury is a fintech company, not an FDIC-insured bank. Banking services provided by Choice Financial Group and Evolve Bank & Trust ®️; Members FDIC. Deposit insurance covers the failure of an insured bank.
is an outstanding choice if you’re looking for a financial provider that offers sweep accounts. This financial technology (fintech) company extends FDIC insurance
Mercury is a fintech company, not an FDIC-insured bank. Deposits in checking and savings accounts are held by our banking services partners, Choice Financial Group and Evolve Bank & Trust ®; Members FDIC. Deposit insurance covers the failure of an insured bank. Certain conditions must be satisfied for pass-through insurance to apply.
coverage up to $5 million through its sweep account services. Additionally, Mercury’s Treasury
Mercury Treasury, by Mercury Advisory, LLC, an SEC-registered investment advisor. Registration with the SEC does not imply a certain level of skill or training. SEC registration does not mean the SEC has approved of the services of the investment adviser.
product offers higher yields on balances over $500,000. For more information, visit Mercury’s website.
What is a sweep account?
Sweep accounts facilitate the transfer of funds between business accounts when the balance exceeds a certain limit. The primary purpose is to allow excess funds to earn additional interest in another account, typically a money market account. Another benefit of using sweep accounts is extending Federal Deposit Insurance Corporation (FDIC) coverage beyond the standard limit of $250,000.
How do sweep accounts work?
Sweep accounts are designed to manage funds in a checking account efficiently. This is how it generally works.
- The customer maintains a main checking account where business payments are deposited and operational costs are paid.
- A target balance or threshold amount is set for this checking account. When the account balance exceeds this threshold, any excess funds are automatically transferred, or “swept,” into a higher interest-earning account, such as a money market account or an investment fund that offers better rates than the checking account.
- Conversely, if the balance in the checking account falls below the target amount, funds can be transferred back from the sweep account to restore the checking account balance.
Sweep account example
To understand how sweep accounts work, consider the following example:
Imagine you have a checking account with a balance of $4,000. You also opened a sweep account and set a threshold of $6,000 for your checking account. In this scenario, no transfer occurs because your balance is below the $6,000 target amount.
A few days later, you deposited $5,000, bringing your total balance to $9,000. Since this amount exceeds your target balance of $6,000, the excess $3,000 will be transferred to the sweep account.
However, if you withdraw $4,000 from your checking account, your balance will drop to $2,000, below the established threshold. As a result, the $3,000 held in your sweep account will be transferred back into your main checking account.
Sweep account interest rate
Interest rates for sweep accounts can differ depending on the type of account and the provider. These rates are typically tiered based on your account balance and are subject to change at anytime. Some financial institutions may adjust their rates weekly in response to prevailing economic and market conditions.
Types of sweep accounts
Before deciding to open a sweep account, it’s important to understand the different types the financial institution offers, along with their terms and associated fees.
- Business/money market sweep account: This type allows you to transfer excess funds from your business account into a higher-interest account, typically a money market account.
- External sweep account: Some providers offer this option to sweep funds into partner banks. This strategy increases fund protection by expanding the FDIC coverage for business accounts beyond the standard limit
. - Loan sweep account: Excess funds from your accounts can be automatically transferred to cover loan obligations, helping to pay off your business loans sooner.
- Zero balance account/sweep transfer account: This account automatically moves excess funds to and from a master account to manage company expenses, such as payroll and travel reimbursements.
- Brokerage sweep account: Your funds can be moved to a brokerage account where they may be invested. It’s advisable to consult with a financial advisor before making any investment decisions.
Consider each option carefully to determine which sweep account best fits your business needs.
How to open a sweep account
Opening a sweep account can vary based on the provider, but the following steps outline the typical process:
- Before picking a business bank, check that the financial institution offers a sweep account.
- Choose which type of sweep account aligns with your business needs.
- Review the terms of the sweep account to understand important details such as the fee structure, monthly transaction limits, and other relevant information.
- Ensure you have a primary account where funds will be transferred into the sweep account.
- Set a cash limit; amounts exceeding this limit will be transferred to the sweep account.
- Decide where you want to allocate your excess funds. You can transfer your cash to high-yield savings products, like money market accounts, or use it to repay a business loan, credit card, or line of credit.
Benefits of a sweep account
Businesses can benefit from sweep accounts in several ways: they can earn interest on idle funds, protect larger reserves, and streamline cash management.
- Extra earnings: As an entrepreneur, growing your business funds is essential. Maximizing the earning potential of excess cash can be advantageous. Be sure to research providers that offer high-yield money market accounts before establishing a sweep account.
- Higher FDIC coverage: If your business maintains larger reserves, protecting those funds is crucial. Look for providers that offer sweep accounts to increase your FDIC protection beyond the standard coverage limit.
- Simplified cash management: With sweep accounts, you can set up automatic transfers for your excess funds instead of visiting a branch. This lets you enjoy peace of mind, knowing your idle cash is earning interest or is reserved for loan payments.
Sweep accounts vs cash management accounts
Financial providers offer sweep accounts and cash management accounts, but it is important not to confuse the two products. Below is a table that shows their differences.
| Offers limited features | Offers combined features of checking and savings |
| Allows access to FDIC coverage beyond the standard limit | Insured by the FDIC or SIPC for up to $250,000 per account |
| Lacks debit cards and check writing abilities | Provides debit cards and check writing abilities |
Sweep accounts optimize interest earnings on unused cash, while cash management accounts are useful for paying bills, making purchases, and withdrawing funds using a debit card. Both offer insurance protection through the FDIC or SIPC. However, sweep accounts can expand their insurance coverage through partnerships with banks.
Frequently asked questions
What is the downside of a sweep account?
Sweep accounts may incur fees, which can be costly if your small business has low reserve funds.
Can I withdraw money from my sweep account?
Yes, you can transfer money from your sweep account back to your primary account to withdraw funds. However, a penalty may apply for premature withdrawals.
What is the difference between an FD and a sweep account?
Fixed deposit (FD) accounts differ from sweep accounts in that FDs are typically held for a fixed term at a specific interest rate, which is usually higher than traditional savings. In contrast, sweep accounts do not hold funds for a fixed period and allow transfers to and from the primary account. Depending on the account type, sweep accounts can provide higher FDIC protection or facilitate loan payments.
Do sweep accounts pay interest?
Yes, sweep accounts can help you earn interest on your excess company funds instead of leaving them idle.
