Your business can sweep up extra cash with a different account
By Jay MacDonald • Bankrate.com

Got extra money gathering dust in your commercial account? Then it's time to sweep it into an investment vehicle that can earn your business some bucks.

Sweep accounts combine a business checking account with an investment account, usually a money market mutual fund. They were devised as a way to get around a decades-old government regulation that prohibits banks from offering interest on commercial checking accounts.

The big guys have enjoyed sweep accounts for years. Now the banking industry is downscaling many corporate products, including sweep accounts, to meet the needs of the fast-growing entrepreneurial market, meaning small businesses can earn daily returns on excess cash on hand.

"The large corporations generally have an investment officer to manage their cash," says Sue Grant, vice president of corporate product management with Cleveland-based Keybank.

"Sweep accounts give companies that do not have the time or resources to monitor their daily investment position the ability to maximize their earnings."

Pump up the payoff
Whatever the size of your business, the key to staying afloat is cash flow management. For years, squeezing every possible earning opportunity out of your commercial account was time-consuming, cumbersome, and for most, hardly worth the effort.

The beauty of a sweep account for a small business is that it's daily and automatic. Once your checking balance reaches a certain threshold negotiated between you and your bank, money is swept overnight from the stagnant commercial account into interest-yielding money market funds, available in a variety of interest rates and risk levels.

In many cases, if your commercial account drops below its required balance, the bank automatically sweeps back enough to restore the minimum. No more guesstimating your balance and rushing to the bank before closing to transfer money between accounts.

Your earnings will largely depend on the fund into which you sweep your excess cash.

"You're really dependent on what rates are available out there," says Grant. "Last year, they were up to 5.5 to 6 percent, but with the Fed cutting rates, we're currently down to 3.29 percent. It really depends on the market conditions."

Several options, but at a cost
While it's tempting to say that anything is better than the goose egg you're making now, sweep accounts involve some cost, including monthly fees and penalties for falling below the minimum balance or exceeding the maximum number of monthly free sweeps.

In all likelihood, however, the costs associated with your sweep account will be more than offset by the interest you earn.

For example, Keybank offers two sweep accounts:

• Business Total Access sweeps anything over $10,000 daily into any of seven Victory funds, Keybank's proprietary mutual funds. Nonprofits or sole proprietors have the option to sweep into FDIC-insured products, as well. The fee: $11.50 a month or $125 annually. The fall-below fee is $10.75 a month.
• Business Investment Account is a zero-balance account where all incoming funds are put to work. ZBA accounts are tailored to upper-end small businesses ($7 million-plus) seeking the greater returns of a cash management service. This account fee is $125 a month.

As the competition for small business customers has increased, banks have become more creative with their sweep offerings. In addition to money market mutuals, you may be given the option of sweeping into certificates of deposit, repurchase agreements (government-guaranteed returns on the bank's securities) and even some non-investment accounts, such as loans.

"Sweep accounts are much easier to do today, especially since financial institutions offer online monitoring and transfer capabilities," says Grant. "It gives the small-business owner a huge advantage over what they had a few years ago. Now you can monitor everything online."

Larger banks sweep up
Not everyone is delighted with sweeps, however.

Robert Davis, managing director of government relations for America's Community Bankers, classifies the current state of sweep accounts as a mixed blessing for small business.

"Yes, because there is a demand for sweep accounts, over time more have been offered and have begun to reach to relatively smaller businesses where once only larger businesses had access to them," he says. "But there are still very significant impediments in place that prevent them from being cost-effective for medium and small banks to offer sweep services."

Davis says community banks are at a disadvantage against larger banks that can offer sweep accounts tied to their own in-house mutual funds.

"If you're not large enough to have that scale of operation, you have to contract with someone else, and that obviously introduces another provider to your customer," he notes.

That has created an imbalance that Davis believes is detrimental to smaller banks, the communities they serve, and ultimately the small-business customer.

"Those institutions that can offer large-scale operations are using the current legal prohibition to price discriminate because they know there is much less competition for a small-business customer in a sweep arrangement," says Davis.

"The big and the powerful customer gets a good deal, and if you're in less of a position to negotiate because you have fewer competitive opportunities, you end up paying more."

Life after Regulation Q
Sweep accounts came about as a creative way to get around government Regulation Q, which prohibits banks from offering interest on commercial checking accounts.

Some headway has been made in overturning the regulation. A measure to do just that recently cleared the U.S. House by a wide margin. Will the fall of Reg Q then signal the demise of the industrious little sweep account?

"No, not necessarily," says Davis. "Initially, the legislation would basically permit sweeping between two accounts in the same bank for the first two years.

"You wouldn't be able to collect interest on your business checking account, but you could keep a separate interest-bearing account and make 24 transactions a month between the accounts. There are never more than 24 business days in each month, so you could do it at the end of each business day.

"Sweep arrangements for certain sorts of entities, in my judgment, will continue to exist even though they are relatively costly, as long as there is a sufficiently significant difference between the cost of holding reserves and not holding reserves."

In fact, Grant predicts elimination of Reg Q will mean more variety in sweep offerings, not less.

"I think you're probably going to see more competitive sweep products instead of the basic ones that have been offered. I think you'll see the focus of different financial institutions changing. I think that banking, which has always looked to grow deposits, may add more investment-type products, too," she says.

"I think you're always going to look for the small-business owner to always have that automated type of investment. They will probably just be doing a little more shopping around to look at the investment-type yields on sweep products."

Jay MacDonald is a contributing editor based in Florida.

-- Posted: Nov. 2, 2001