May 28, 1997
SWEEPS AREN'T JUST FOR THE BIG GUYS ANYMORE
Edited by Fred Strasser
For years, small companies with financial savvy have asked banks to offer them the same sweep accounts available only to companies with big balances. Now, competition from financial services companies such as Merrill Lynch is forcing banks to let small players in on the sweeps action.
What's a sweep account? Simply, it earns a better return than the interest on a checking account by "sweeping" excess money into higher-yielding vehicles, such as a money-market fund, stock fund, or Treasuries. Usually, you're given a choice of accounts in which to move the money. Essentially, a sweep account helps automate much of what a CFO does, but the automation gets the money working for you faster and with less overhead cost. Some companies use a sweep to pay off debt faster.
On average, money-market funds offer returns one or two percentage points over the interest paid on ordinary checking and savings accounts. If you sweep money from a checking account earning 2.5% interest into a mutual fund returning 4.8%, for example, that's an extra $2,300 a year on an average balance of $100,000. Of course, returns aren't guaranteed (yes, you can lose money), and deposits in most cases are not insured by the Federal Deposit Insurance Co.
Some banks will sweep your entire balance overnight and on weekends and return it in time for the next business day. Other types of sweep move amounts over a certain threshold. Some banks set that threshold, while others let you set your own, based what your business needs daily for operations. The good news for small business: Thresholds set by banks are coming down to levels more accessible to smaller enterprises.
At a threshold of $25,000, 61% of businesses with sales between $1 million and $10 million have enough money to qualify for a sweep account, according to a report from Payment Systems Inc., a financial services market research firm. That may be why sweep use among such companies has risen from about 6% in 1992 to about 15% last year.
Monthly fees to maintain a sweep account are about $20 to $40 at the low end but can run as high as $150, with additional charges for additional services. Terms vary widely so shop around. Make sure you'll earn enough in additional returns to cover the fees. Start at your own bank, which may have sweeps but offer them only to those who ask.
Fleet Bank, for example, has been running a pilot small-business sweep account program in New Hampshire since last October and will extend it to metro New York and New Jersey this summer. In June, KeyCorp. will launch a Small Business Cash Management Account, with a $50 monthly fee and limited withdrawals.
Donald W. Hance, vice-president for small-business banking at Union Bank of California, says he has noticed an increasing clamor for sweeps in the last two years and that his bank is selling several hundred sweeps each quarter.
Other findings in the Payment Systems survey suggest that any small business that signs for a sweep will be in good company. Businesses that use sweep accounts are more likely to have a CFO (50% vs. 27%) and have higher average balances -- $145,000 vs. $66,000. And that's money in the bank.
By Edith Updike in New York
