The Federal Deposit Insurance Corp. (FDIC) insures and guarantees all bank accounts for up to $250,000, but what happens to those funds if a bank goes under? Any funds in excess of $250,000 would most likely be lost.
Commercial Sweep Accounts are a bank product that can help you, as a business owner, protect your funds when your cash on hand exceeds $250,000. Commercial Sweep Accounts are not FDIC insured, but they allow a bank to collateralize your funds with bank-owned securities.
How a Commercial Sweep Account Works
Each day, money will be swept from your business’s main commercial checking account and invested into bank-held securities if the funds are in excess of the account’s target balance, which is set by the bank and the customer. The bank will then send you daily updates, showing you the balance of all the bank’s securities, matched up with your sweep account balance, so you always know where your money is.
If your main commercial checking account ever drops below the target balance, money will be swept from the bank-held securities, back into your checking account.
Before the 2008 financial crisis, Commercial Sweep Accounts were seldom used since many people had faith in the banking system at the time. When the market crashed, however, a lot of people lost money that was not FDIC insured.
Now many business owners, especially those with at least $500,000 cash on hand, are turning to Commercial Sweep Accounts, like those offered at Northwest Bank, to keep their funds secure and get their money working for them.
What are the Benefits?
- Your Money is Secure
Since any money in a Commercial Sweep Account is invested in bank-held securities, and is not in your bank account, those funds will be safe if your bank goes under. In this unlikely event, the bank’s first step would be to transfer those securities to your business to match your balance, so they’re 100 percent made whole.
- Financial Return
Some businesses are still setting their target balance in their main commercial checking accounts at $250,000 since that amount is insured, but commercial checking accounts don’t earn interest. Commercial Sweep Accounts can either earn interest or see a financial return based on the securities’ market performance. By putting a little more money into a Commercial Sweep Account, you can maximize your financial return each month.
- Automation Makes it Easy
Transferring money for your main commercial checking account to a commercial savings account on a daily basis can be cumbersome. Commercial Sweep Accounts take the manpower out of transferring. Money is transferred automatically on a daily basis to help ensure that you can cover your business expenses and avoid overdraft fees on your account.
All Sweep Accounts are not Created Equal
The terms of Commercial Sweep Accounts vary by bank.
In some sweep accounts, banks will purchase securities with funds on your behalf, and they will be subject to the same risks as any other stock market investment. In this kind of sweep account, you could end up making more money when the market is good, but you could also lose money if there is an economic downturn.
In other Commercial Sweep Accounts, like those offered at Northwest Bank, the bank holds the securities and pays the business owner a fixed interest rate, so the customer is not risking their funds on the market. In this case, if there’s an economic downturn, the customer won’t take a loss and will still be earning interest on their funds.
Is a Commercial Sweep Account Right for Your Small Business?
Commercial Sweep Accounts are usually best suited for businesses with at least $500,000 cash on hand since a sweep account doesn’t pay a higher interest rate until they get over the $250,000 threshold. For business owners with only about $300,000 cash on hand, the sweep account would not be beneficial since they would likely not be hitting the $250,000 mark in the sweep account.
Businesses with under $500,000 cash on hand will usually be better off opening a commercial savings account and managing transfers themselves.
Monthly fees for Commercial Sweep Accounts start at $20 to $40 per month at some banks but can run as high as $150 or more at other banks. When considering a sweep account, always make sure that you will be earning enough interest each month to offset the bank’s fees, otherwise it will not be worth it.
To learn more and find out if a Commercial Sweep Account is right for your business, contact a Treasury Service Representative at Northwest Bank today!
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