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Sweep accounts are a particular type of bank account where funds are automatically transferred between different accounts to optimize the use of available cash and maximize returns while minimizing risk and manual funds transfers.
With a sweep account, any amount of funds that exceed a certain, pre-set amount are “swept” into a higher interest-earning account. These sweeps can happen at the end of the business day or on another, pre-determined schedule. The idea behind sweep accounts is to maintain sufficient liquidity for daily operations while taking advantage of short-term investment opportunities for any surplus funds.
Originally created to get around government regulations that prevented banks from being able to offer interest bearing checking accounts, the primary purpose of a sweep account is to ensure that idle funds in a customer's account are put to good use.
Sweep accounts can be especially useful for businesses with fluctuating cash flows or individuals who want to make the most of their available funds without having to actively manage transfers between accounts.
How do Sweep Accounts Work?
Here's how sweep accounts generally work:
- The customer's primary account is usually a checking account where day-to-day transactions, like deposits and withdrawals, take place.
- If the balance in the checking account exceeds a certain predefined threshold (also known as the target balance), the excess funds are "swept" or automatically transferred into an investment account, such as a money market fund or another low-risk, interest-bearing account. This helps to earn a higher rate of return than what a regular checking account would offer.
- Sweep accounts can also move money in the opposite direction, with funds “swept” from an investment account back to a checking account if the target balance drops below a certain amount.
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