# Understanding Sweep Accounts: Types, Benefits, and Their Operation

## What Is a Sweep Account?

A sweep account is a bank or brokerage account that automatically moves money into a higher-interest account. At the end of each business day, any amounts that exceed a certain balance are transfered to another account, usually a [money market fund](https://www.investopedia.com/terms/m/money-marketfund.asp). This allows businesses and individuals to earn interest on cash that would otherwise be idle.

While sweep accounts can make good business sense, they may be accompanied by higher fees. Read on to learn how these accounts work.

### Key Takeaways

*   Sweep accounts help maximize returns by transferring excess funds into higher interest-earning investment options like money market funds at the end of each business day.  
    
*   They simplify financial management by reducing cash drag through automatic transfer mechanisms, ensuring idle funds are working to earn higher yields.  
    
*   While sweep accounts can enhance earning potential, they may come with associated fees that need to be considered to evaluate their net benefit.  
    
*   The use of sweep accounts spans both personal and business finance, helping individual investors park idle cash and small businesses manage excess cash reserves efficiently.  
    
*   Historical regulations against interest on checking accounts led to the creation of sweep accounts, serving as a strategic tool to bypass those limitations for better financial outcomes.

![Sweep Account](https://www.investopedia.com/thmb/PrD_zwSpnX6ye_5wYx2J9eHD_RI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/sweepaccount.asp-Final-e0b16e87c6be4879a9376eec7787c292.png)

*— Investopedia / Dennis Madamba*

## How Sweep Accounts Operate and Why They're Needed

Using a sweep vehicle like a sweep fund works by providing the customer with the greatest amount of interest with the minimum amount of personal intervention by transferring money at the end of the day into a high-interest account. In a sweep program, a bank's computers analyze customer use of [checkable deposits](https://www.investopedia.com/terms/c/checkable-deposits.asp) and sweep funds into money market deposit accounts.

Some brokerage accounts have similar features that enable investors to gain additional returns for unused cash. Sweep accounts are simple mechanisms that allow any money above or below a set threshold in a checking account to be swept into a better investment vehicle. Federal banking rules once banned interest on checking accounts, creating a need for sweep accounts.

> **Important**
>
> Sweep accounts were originally devised to get around a government regulation that limited banks from offering interest on commercial checking accounts.

Sweep accounts, whether for business or personal use, provide a way to ensure money is not sitting idly in a low-interest account when it could be earning higher interest rates in better liquid cash investment vehicles. These investment vehicles that provide higher interest rates while still offering [liquidity](https://www.investopedia.com/terms/l/liquidity.asp) include money market mutual funds, high-interest investment or savings accounts, and even short-term [certificates](https://www.investopedia.com/terms/c/certificateofdeposit.asp) with 30-, 60-, or 90-day maturities for known layovers in investments.

Businesses and individuals need to monitor the costs of sweep accounts, as the benefit from higher returns from investment vehicles outside the checking account can be offset by the fees charged for the account. Many brokerages or banking institutions charge flat fees, while others charge a percentage of the yield.

> **Warning**
>
> Sweep accounts may not be free, and broker fees may make the account less attractive on a net basis.

## Comparing Personal and Business Sweep Accounts

Brokerages use sweep accounts to hold investors' cash, like dividends and sale profits, until reinvestment. These funds are typically swept into high-interest holding accounts or money market funds until an investor decides on future investments or until the [broker](https://www.investopedia.com/terms/b/broker.asp) can execute already-standing orders within the portfolio.

Sweep accounts are a typical business tool, especially for small businesses that rely on daily cash flow but want to maximize earning potential on sitting [cash reserves](https://www.investopedia.com/terms/c/cash-reserves.asp). Businesses set a checking account minimum; excess funds then move to higher-interest investments. The [business might also use a credit sweep](https://www.investopedia.com/terms/c/credit-sweep.asp) to move the excess funds over to pay down pending lines of credit. If the balance ever dips below the threshold, the funds are swept back into the checking account from the investment account.

Depending on the institution and investment vehicle, the sweep process is generally set daily from the checking account, while the return of funds can experience delays. With the changes in regulations on checking accounts, some banking institutions also offer high-interest rates on amounts over a certain balance.

## How Do Sweep Accounts Work?

A sweep account is a type of bank or brokerage account linked to an investment account and automatically transfers funds when the balance is above or below a preset minimum. Typically, this is used to sweep excess cash into a money market fund, where it will earn more interest than an ordinary bank account. Sweep accounts can also work the other way around, moving funds from an investment account to a checking account when the owner's balance falls below a set threshold.

## What Is the Difference Between Personal and Business Sweeps?

Brokerages typically use individual sweeps to store client funds until the owner decides how to invest the money. For instance, a sweep account might move excess cash to a money market fund, where it will earn greater returns than an ordinary checking account. Small companies with large cash flows often use business sweep accounts. They allow the company to earn interest on excess cash reserves while ensuring they have enough cash to pay for business expenses.

## Why Are Sweep Accounts Useful?

Sweep accounts, whether for business or personal use, are an easy way to ensure that money is earning a return rather than sitting in a low-interest bank account. Some institutions offer an auto-sweep feature linking the sweep account to the non-sweep account. The transfers are initiated automatically when the defined thresholds (upper and lower) are crossed.

## The Bottom Line

Sweep accounts transfer surplus money between a client's cash and investment accounts. This allows the account holder to earn some interest while keeping their resources liquid. However, they do come with higher fees, so it may be worthwhile to consult an investment professional to decide if they have a net benefit.

> **Article Sources**
>
> 1.  U.S. Securities and Exchange Commission. "[Investor Bulletin: Bank Sweep Programs](https://www.sec.gov/oiea/investor-alerts-bulletins/ib_banksweep.html)."
>     
> 2.  Board of Governors of the Federal Reserve System. "[Press Release: Federal Reserve Issues Final Rule To Repeal Regulation Q, Which Prohibited the Payment of Interest on Demand Deposits](https://www.federalreserve.gov/newsevents/pressreleases/bcreg20110714a.htm)."
>     
> 3.  National Archives, Federal Register. "[Prohibition Against Payment of Interest on Demand Deposits](https://www.federalregister.gov/documents/2011/07/18/2011-17886/prohibition-against-payment-of-interest-on-demand-deposits)."