A sweep account is a specialized bank account that receives transferred funds from another business bank account once it exceeds a specified balance threshold. This is done primarily for one of two reasons: to earn a higher interest yield than a standard account or to extend Federal Deposit Insurance Corp. (FDIC) insurance beyond the limits of a standard account.
If you are looking for a banking provider that uses sweep accounts, Mercury is a great option. It is a financial technology (fintech) company that uses sweep accounts to extend your FDIC insurance to $5 million. In addition, Mercury’s Vault product earns a higher interest yield on balances greater than $500,000. Visit its website for more information.
Key takeaways
- Sweep accounts are often money market or brokerage accounts, allowing you to earn a higher interest rate than standard business checking accounts.
- Using sweep accounts can allow banks and fintechs to spread your money across partner banks to extend your FDIC insurance beyond the standard $250,000 limit.
- While some banks offer sweep accounts for free, others will charge you either a flat rate for the service or a percentage of the interest yield earned.
How Sweep Accounts Work
Sweep accounts allow you to earn higher interest returns or extended FDIC insurance on your business finances without dealing directly with multiple banks. All of your transactions will still be with your primary bank, even if the sweep accounts are at other financial institutions.
They can also pay off business loans or lines of credit. They can also return funds to your primary bank account if funds drop below a minimum threshold.
Here is how sweep accounts work:
- You or the bank will set minimum and maximum thresholds on your primary business bank account.
- If the maximum threshold is exceeded on your primary account at the end of the day, funds above this limit are transferred into the sweep account.
- If your primary account balance drops below the minimum threshold at the end of the day, funds are transferred from the sweep account to the primary account to raise it to the required level.
Types of Sweep Accounts
Sweep accounts typically fall into one of four categories:
- Business investment sweep account: This account earns a higher rate of interest yield than the standard account. It is often a money market account.
- External sweep account: This allows your funds to be spread out among partner banks, increasing your maximum FDIC insurance.
- Loan payback sweep account: This allows excess funds to be diverted to a business loan or line of credit, allowing you to pay them off faster.
- Brokerage sweep account: Funds can be swept into a brokerage account, which can then be invested. Check with your financial advisor before investing your excess business funds.
Sweep accounts were created because the Federal Reserve prohibited interest payments on demand deposit accounts. Regulation Q set forth this prohibition as stated in Section 19(i) of the Federal Reserve Act. It was repealed as part of the Dodd-Frank Act, effective July 21, 2011.
IntraFi Network Deposits ICS & CDARS
IntraFi Network Deposits offer one major external cash sweep account service. The company combined Certificate of Deposit Account Registry Service (CDARS) and Insured Cash Sweeps (ICS) with some of its financial offerings in 2021 to provide all of those services together.
IntraFi, a network of more than 3,000 banks nationwide, provides CDARS and ICS to allow banks to spread deposits across multiple financial institutions, with customers receiving $250,000 of FDIC insurance at each bank.
This allows you to receive up to $150 million in FDIC insurance while only conducting business with your primary bank. Banks and fintechs usually cap their extended FDIC insurance at between $2 million and $6 million.
Pros and Cons of Sweep Accounts for Business
| PROS | CONS |
|---|---|
| You can earn higher rates of interest. | There can be fees involved with sweep accounts. |
| You can get FDIC coverage above the standard $250,000 limit. | If the sweep account is a brokerage account, those funds aren’t FDIC-insured. |
| It is a great way to set up a rainy day fund for your business. | |
There are several benefits to sweep accounts:
- Interest earnings: You can earn interest on excess business finances that might not be earning interest in your standard bank account.
- Extended FDIC insurance: As most standard accounts are limited to $250,000 of FDIC insurance, an external sweep account can increase that insurance significantly.
- Rainy-day fund: Not only can the interest yield earn you more money for your company, but the secondary account can also help keep your standard bank account above a set threshold by sweeping money back into that account if funds get low.
There are a couple of drawbacks to sweep accounts:
- Cost: While many banks and fintechs offer sweep accounts for free, some will charge either a flat fee or a percentage of the interest yield as a maintenance fee. Ensure you earn more money with the sweep account than you pay in fees.
- Reduced FDIC insurance: While sweep networks can extend your FDIC insurance, this is not the case if the sweep account is a brokerage account. If you are sweeping funds into a brokerage account, those aren’t insured by the FDIC. However, they may be covered under the Securities Investor Protection Corporation (SIPC). Check with your bank for more information.
Fintechs and Online Banks That Use Sweep Accounts
Below are two fintech options and one online bank for insuring more than $250,000 for your business. Before switching financial institutions, check with yours to see if it offers CDARS or ICS, which can allow you to increase your protection.
Annual Percentage Yield (APY) | Cash Deposit Fee | ATM Fee | FDIC Insurance | |
|---|---|---|---|---|
 | Up to 5.48% with Treasury Account | No cash deposits | None at Allpoint ATMs | Up to $5 million |
Visit Mercury
Provider is a fintech platform backed by and FDIC-insured through a supporting bank partnership with Evolve Bank & Trust.
| ||||
| 4.25% with Bluevine Premier | $4.95 (Green Dot) or $1 + 0.5% of deposit (Allpoint+ ATM) | None at MoneyPass ATMs | Up to $3 million with Bluevine Premier |
Visit Bluevine
Provider is a fintech platform backed by and FDIC-insured through a supporting bank partnership with Coastal Community Bank.
| ||||
| 1.01% for Business Interest Checking | None at MoneyPass and Allpoint ATMs | Unlimited domestic ATM reimbursements | Up to $150 million using ICS |
Check out our list of the best small business checking accounts for other banks and fintechs that use sweep accounts. In addition, see our guide on opening a business bank account for a list of the documents and procedures required to open an account.
Frequently Asked Questions (FAQs)
One major downside to a sweep network is it often comes with fees. Some banks and fintechs will charge either a flat fee or a percentage of the interest yield earned, so it is vital to ensure you earn more interest from your sweep account than you pay in fees.
Yes, you can withdraw money from a sweep account. You can set a minimum threshold in your primary account to transfer money from your sweep account back into your primary account. This will ensure you have the funds to cover day-to-day expenses. Your bank may charge a fee for this service, however.
One of the primary reasons to use a sweep account is to move excess business funds into a high-yield money market account. This allows you to make money on your reserve funds rather than leaving them in your primary account, which may not draw interest.
Bottom Line
Sweep accounts are a great way to earn extra money for your business while protecting your funds from potential bank failures. Moving money into high-yield interest accounts allows you to earn passive income for your business. Extended FDIC insurance can ensure your business is covered as it outgrows the standard insurance protection limits.
