Sweep accounts are a financial management tool used in American banking to optimize the interest earned or to manage liquidity more effectively. In a sweep account, funds are automatically “swept” at the end of each business day from a primary checking account into a higher-interest investment option, such as a money market fund or an overnight interest-bearing account.
The purpose of sweep accounts is to ensure that cash is not sitting idly in a checking account when it could be earning interest elsewhere. They are used by businesses and individual investors who want to maximize their returns on cash assets without manually transferring funds between accounts.
These accounts solve the problem of managing large volumes of cash that may flow in and out of a primary account. By automatically transferring idle cash, sweep accounts eliminate the need for account holders to monitor their cash positions and make frequent manual transfers.
The main benefit of a sweep account is the potential for additional income through interest earnings, as well as improved liquidity management. Funds swept into a money market account, for example, can still be relatively accessible while earning a better return than if they remained in a non-interest-bearing checking account.
An example of how a sweep account may be used: A business receives daily payments from customers and has a sweep account linked to its main operating account. At the end of the day, any cash over a certain threshold is swept into a money market fund. When the business needs to cover expenditures, funds are swept back into the checking account from the investment account to maintain the necessary balance. This process helps the business to earn interest on its positive cash balance, thus enhancing its overall financial position.
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This page was last updated on February 24, 2024.
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