What Are Sweep Accounts?

Sweep accounts are an important tool for business owners to manage cash flow. A sweep account is a type of bank or investment account that automatically transfers funds between two different accounts, such as a savings account and a checking account, on a regular basis to optimize their balance. The purpose of a sweep account is to provide businesses with the ability to maintain a steady balance between their accounts and keep an adequate reserve handy for emergencies, investments, or other needed expenses.

Benefits of Sweep Accounts

Using a sweep account can provide both practical and financial benefits for businesses. For example, a regularly scheduled automatic transfer of funds helps businesses stay organized, ensuring that necessary funds are always accessible. A sweep account can also help businesses earn more interest than if the funds were held in a traditional savings account. This is because the sweep account alternates the funds from an interest-bearing savings or money market account to an interest-bearing checking or demand deposit account. The ability to earn more interest can help businesses increase their bottom line. Another benefit of sweep accounts is the ability to protect excess funds from overdraft. When the funds are moved between accounts, the balance of the ‘from’ account is never allowed to fall below a pre-set threshold.

Example of a Sweep Account

An example of how a sweep account could be used is, let’s say a business sets up a sweep account with a savings account balance of $5,000 and a checking account balance of $3,000. From this point on, any time the balance of the savings account falls below $3,000, money would be automatically transferred from the checking account to the savings account. Doing this helps the business maintain a steady balance between the two accounts, and also helps to protect the business from an overdraft.

Conclusion

Sweep accounts are an invaluable tool for business owners looking to manage their cash flow more effectively. They help businesses stay organized, earn more interest, and protect their funds from overdraft. College students learning about business and finance should make sure to take the time to research and understand the benefits sweep accounts can provide to ensure they are getting the most out of their money.